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2PO3 Midterm review

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Hannah Holmes

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 away. 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 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 towns. 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 other.  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.  Eg. Baseball only spread after the “knickerbocker Rules th - 1845” The rules were adopted in the 19 century  Set of 20 rules considered the basis for todays game 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 pads,  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 afterwards. 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 sport. o Adding teams to a market diminishes existing teams monopoly power. o Adding teams means more substitutes and the demand curve for the existing teams becomes more elastic. o If teams are making positive economic profit (greater than 0), new firms will want to enter.  The threat of entry puts downward pressure on prices and profits  Gives existing teams incentive to keep out new teams. o If potential owners cant join a league, They have an incentive to start a new league.  Success of new league is uncertain since all the good markets are used up by the existing league.  Eg. WHA 1972-1979 o Neal (1964) sees leagues as multiplant monopolies.  Part of the excitement of a single game comes from how the outcome relate to league standing which involves all teams in the league. o Leagues coordinate the number of games and prices. o Leagues negotiate major tv contracts  Allows for the most popular games to be aired.  Prevents teams form competing from broadcast rights by dropping prices to acquire rights. o Restricting number and location of teams gives owners the guaranteed source of ticket and media source of revenue + a restricted market for apparel sales.  3. Marketing: o individual teams would only advertise In their home markets.  Little incentive to pay for ads that would also benefit other teams.  Teams would want to free ride. o Leagues take a multilevel approach to marketing.  Teams contribute to joint ads running t the league level.  Leagues work to create a specific image to increase demand for the sport as a whole. o Marketing at the league level is something of a public good:  Its non rival –one team benefiting from league advertising doesn’t diminish the benefits enjoyed by another team.  Its non – excludable : one team cant prevent another team from benefiting from league advertising.  Profit: total revenue – total cost o Leagues differ in the level of profitability.  NFL most profitable.  NHL least profitable. o NFL team profits are the most evenly distributed. o Yankees are the least profitable MLB team. o While profit=TR-TC, profit is also closely relates to a teams operating income. o Operating income = difference between the teams revenue and the cost of its day to day operations.  Excludes cost that are not related to daily operations, ex. Interest payments on loans, stadium depreciation. o NFL teams have higher operating incomes than other teams, but that doesn’t mean that operating incomes are always related to highest market values = the price a buyer would pay to purchase the team.  Eg. Dallas cowboys – market value is $2 billion, the operating income of $9-10 million.  Yankees (most valuable baseball franchise) Market value is $1.85 Billion operating incomes -$3 million  TML ( most valuable NHL team) market value $1 billion highest op
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