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ECON 2P03 Study Guide - Midterm Guide: Wayne Gretzky, Knickerbocker Rules, Earnings Before Interest And Taxes

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Hannah Holmes
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FIRST YEAR PRINCIPLES 1/14/2013 6:32:00 AM
Opportunity Cost & Comparative Advantage
Babe Ruth comparative advantage in hitting, got him to specialize
in hitting.
Supply and Demand equilibrium.
2006 Wayne Gretzky card sold for $18000
2011 George vezina hockey card sold $100000
Demand: Increase In price of hockey cards decreases your
purchasing power, this is called the (Income Effect)
Supply: Price change moves supply up or down anything else’s
shifts the whole curve.
Tickets: are considered a normal good, price and income affect
what and where you purchase. Another factor is how the team is
doing. Uncertainty of the outcome of game. Superstar player
accusation. Who are you playing. Is the game meaningful. The
weather. Time of the match. Giveaways.
Ticket Scalping: Illegal but it happens, saying that you cant pay
past the ceiling, but there is a black market which sells them more.
Cant sell for more then the value on the printed ticket price but
knows the tickets are worth more if the game is sold out and they
will sell at the real value of the ticket’s
Why seasons tickets are cheaper.
The team starts earning revenue and starts collecting interest right
When consumers make choices we allocate our income to maximize
our level of satisfaction=utility.
If we had perfect information and knowledge, theses choices would
be straight forward. But we don’t.
We make choices under uncertainty.
Sports is filled with uncertainty eg don’t know how the rookies will
perform. Will their star player get injured. Fans don’t know If their
team will make the playoffs. What the weather will be.
o Its to early to know if they make the playoffs when the game
arrives.(he’ll enjoy the game more if the game has
implications for the team in the post season.) tony will derive

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greater utility from a meaningful game that could affect the
teams standing in the playoffs .
o A ticket to a game that the jays need to win is worth more to
tony than one where it doesn’t matter if they loose. Tony now
has to make a decision faced with uncertainty about how
meaningful that last game will be.
o If Tony Is happy with that level of E(U), he will buy the
tickets. And vice versa.
o Teams offer incentive to get you to buy tickets ie. Lower
seasons ticket prices.
Importance of Leagues.
Pro baseball 7 years before MLB
Pro football 44 years before NFL
Teams played each other on a ad hoc basis
Most games were between teams in the same city
Once transportation improved, teams could play teams form other
o All called Barnstorming
Barnstorming popular but couldn’t guarantee the other team would
show up.
Couldn’t guarantee the size of the crowd.
Earnings tied to winning.
To fans, the league is just a collection of teams who play each
Economically, leagues behave cooperatively
o Made teams succeed at the expense of other teams.
o Success also depends on the success of other teams +
leagues as an institution.
The Functions Of Leagues
1. Setting the rules.
o One of the more important functions.
o Teams have to agree to play the game.
o Having precise rules and enforcing them actually helps sports
to spread.

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Eg. Baseball only spread after the “knickerbocker Rules
- 1845 The rules were adopted in the 19th century
Set of 20 rules considered the basis for todays
o Rules for behavior are also important.
Eg. Players cant bet on the game and the use of
performance enhancing drugs, is banned.
o Rules can change to enhance the popularity of sports.
Eg. 3-pt score in basketball, reducing the size of goalie
Theses allow for higher scores (Americans like high
scoring games.)
2. Limiting Entry.
o Too many teams hurt competition and fan interest.
o To few teams leave room for competing leagues to arise.
o What determines league size:
When a new team enters there are benefits and cost to
existing teams.
Benefit- admission fees from new teams, additional fan
base and addition media outlets.
o Cost:
any shared revenue spread over more teams. Reduces
the teams ability to threaten to move when they are
negotiating with their current home cities.
o If revenue decrease with the addition of more team your
marginal revenue curve would slope downward.
Expected because the most profitable cities are added
first, with the smaller less profitable cities added
o If costs increase with the addition of one more team your
marginal cost curve would slope upward.
o Equilibrium number of teams where MR=MC
o Leagues limit on where teams can enter
Eg. All the major cities have teams in just about every
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