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ECON 2P03 (10)
Chapter 1

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Department
Economics
Course
ECON 2P03
Professor
Krishnakali Sen Gupta
Semester
Winter

Description
Introduction • Professional sports, simply, means that the athletes are paid. • Essentially athletes compete either as individuals (as in golf), on teams (as in football, hockey, etc.) or, in the case of NASCAR, as both an individual and team member. • Athletes competing in individual sports meet up in tournaments held throughout their season. • Their earnings come in the form of prize winnings from these tournaments, endorsements, sponsored appearances… • Athletes competing on teams meet each other in regularly scheduled league games and a playoff series to determine the one champion at the end of the season. • These athletes receive a salary and can also earn income from endorsements… • We’ll spend most of the course examining professional teams in a league structure. Why the Economics of Professional Sports? • Economics is the study of how we allocate scarce resources to satisfy society’s unlimited wants. • Money is the means by which key resources (for example, athletes) are obtained by and allocated among teams to use in competition against other teams. To maximize consumption and add revenues, leagues sell broadcast rights to television and radio for broadcast of matches Like firms, team owners want to maximize profits & must make economic decisions about how to do this Sport teams also have an impact on their host cities (jobs created in arenas and local service industries for example) Labour (athletes, coaches, managers) combine with capital (fields, equipment etc) to produce along with another team a product (entertainment in the form of a game)  Output of professional sports is entertainment; this product is sold to consumers (spectators, fans) usually in a stadium or arena.  Gate revenues are needed to pay salaries and so worth (e.t.c)  Spectators need accommodation but access must be denied to non-payees  Non payees = free riders  Therefore need enclosed stadia The sports/leagues we’ll talk about are: • National Football League NFL • Major League Baseball MLB • National Hockey League NHL • National BasketballAssociation NBA* • NASCAR • Canadian Football League CFL Development of Pro Sports • Ancient Greeks and Romans believed that athleticism was an important part of education – a sound mind in a sound body. • In the 19th century in England, it was unthinkable that the upper class be paid to play sports – to be paid for something meant you were lower class, like a tradesperson. Only ‘poor’ people and working class would participate in anything like a sport. • Moreover, to be able to have time to pass playing sports, you had to actually have leisure time to do so. • Not until the mid 1800s (during the boom of the Industrial Revolution) did standards of living became high enough so that the general public could provide a steady fan base that could support professional organizations. • Soccer (England) and baseball (US) which had both appeared among the more prosperous in society were the first sports to become widely popular national pastimes. • Note that being the best was not as important as being of good character and sportsmanlike • With rising real wages during the second half of the 1800s, more people had access to leisure time. • Soccer spread from its public school roots in England to northern industrial areas, and playing baseball in the US became a way for immigrants to show their “Americanness.” • As these sports became more popular with the working class, the games became more professional. • Working class athletes couldn’t afford to play regularly without compensation for the opportunity cost of their time. • The upper class soon became financiers of teams – realized they could profit from supplying a well run, professional product to a public who could now afford to attend and had the time to participate. • Today, professional sports have become national and international obsessions and are a $600 - billion dollar industry. AQuick Snapshot of the Leagues We’ll Be Covering • NFL – National Football league • 32 teams, split into 2 conferences (AFC, NFC) with 4 divisions (N, S, E, W) with 4 teams in each division • 16 regular season games per team plus a bye week • 12 teams make the playoffs • Winners of each conference play in the Super Bowl for the league championship and the Lombardi Trophy • Founded 1920 • MLB • 30 teams (1 Canadian), split into 2 leagues (AL – 14 teams, NL – 16 teams) with 3 divisions each (E, C, W) • Each team plays 162 regular season games • 10 teams make it to the playoffs • Winners of each league meet in the World Series to play for the championship and the Commissioner’s Trophy • Founded in 1869 (date debatable) • NHL • 30 teams (7 Canadian) • Each team plays 82 regular season games • 2 conferences, 4 divisions: Central and Pacific with 7 teams andAtlantic and Metropolitan with 8 (the Leafs are in theAtlantic division). • The top four teams in each division qualify for the playoffs. • Winners of each conference meet to play for the championship and the Stanley Cup • Originally organized in Montreal in 1917 • NBA • 30 teams (1 Canadian), 2 conferences with 3 divisions with 5 teams each • Each team plays 82 regular season games • 8 teams from each conference make the playoffs • Winners from each conference meet for the championship for the Larry O’Brien Championship Trophy • Founded in 1946 • NASCAR • Stands for NationalAssociation for Stock CarAuto Racing • 3 series – Sprint Cup, Nationwide, Camping World Truck (Sprint Cup is the big one) • 36 races over 10 months (43 drivers qualify for each Cup race) – top 12 drivers make The Chase (their version of a playoff) who compete for the Sprint Cup championship over the last 10 races of the season • Formed in 1948 • CFL – Canadian Football League • Currently 8 teams split into East and West divisions (Ottawa Redblacks to play in 2014) • Each team plays 18 regular season games • 6 best teams regardless of conference make the playoffs (division winners get a 1st round bye) • Winner wins the Grey Cup • 1993 – 1995: US teams in the league; Baltimore Stallions won the Grey Cup in 1995 (became theAlouettes the next season) • Each team must have 21 Canadians on their roster • Founded in 1958 (been around since 1909) Some Big Differences Between NFL & CFL • The CFLalso has something called a rouge. • This is a single point when the kicking team punts through the end zone, misses a field goal or the returning team takes a knee in the end zone. • So if you miss a field goal, you can still get a point for trying. How Canadian of us;) First Year Principles and Pro Sports • Opportunity Cost and ComparativeAdvantage What is opportunity cost: It is the loss of other alternatives when one alternative is chosen. ComparativeAdvantage: Is an actively that you can do more efficiently than any other activities • Babe Ruth was considered to be one of the best (southpaw) pitchers in baseball in the first part of the 20th century. • He helped the Boston Red Sox win the World Series in 1916 and 1918. • In 1919, he pitched only 17 games. • Ruth became one of the greatest heavy-hitting outfielders in history. • So why the switch? Whatever the Sox’s decided to do with Ruth, he had an opportunity cost -> if he stayed a pitcher, he’d forgo reaching his potential as a hitter -> if he went to the outfield, his pitching would be forgone As the best pitcher and best hitter, Ruth had an absolute advantage over the competitive in both pitching and hitting • But Ruth had a comparative advantage in hitting. He gave up his pitching so he could specialize in hitting (in which he was even better) The sox’s rationale was that they figured they would win more games with Ruth in the outfield, than they’d lose without his pitching By having Ruth specialize in the activity in which he had a comparative advantage, the Sox (later NYY) would realize gains from trade Babe Ruth had a comparative advantage in hitting so they got him to specialize in hitting. Demand, Supply and Equilibrium • In August 2006 a Wayne Gretzky rookie card sold for a record breaking $80,000, becoming the most expensive hockey card in existence at the time. In April 2007 a mint graded 1911-12 Georges Vezina rookie hockey card shattered the record price ever paid for a hockey card at $100K. • Why is one more valuable than the other? • Recall: • Law of Demand: as P increases, Qd decreases and vice versa. • Achange in the own price of a good leads to a change in quantity demanded (movement along the demand curve). • Ashift in the demand curve due to a change in consumer incomes, prices of related goods, tastes, expectations or population is a change in demand. • Consider the demand for hockey cards in general. • When the price of hockey cards goes up, consumers buy fewer hockey cards and buy relatively cheaper products (could be baseball cards, fan apparel, snacks etc). Substitution affect • When the price of hockey cards goes up, consumer purchasing power goes down (they can’t buy as much of all products they were consuming if they have to spend more on hockey cards). Income affect Now recall: • Law of Supply: as P increases, Qs increases and vice versa. • Achange in the own price of a good leads to a change in quantity supplied (movement along the supply curve). • Ashift in the supply curve due to a change in production costs, technology and hence productivity, expectations or number of firms in the industry is a change in supply. • When Qd = Qs, we have a market equilibrium. • No shortages, no surpluses. • The market has cleared. • No reason for consumers or firms to change their behaviour (how much they are consuming or selling). • We never really get to “see” demand and supply curves, but we get to “see” equilibrium prices. • For example, there are regularly published price guides for sports trading cards that report the going – market equilibrium – price for individuals cards. So why are some cards worth more than others to consumers? Price Elasticities of Demand and Supply • Elasticity measures how responsive Qd or Qs are to changes in the price of a good. • For either demand or supply, the following are true: • If Ep = 0, perfectly inelastic (curve is vertical) • If Ep < 1, inelastic (curve is steep) • If Ep > 1, elastic (curve is flatter) • If Ep => infinity, perfectly elastic (curve is horizontal) • Elasticity is more precise when we can calculate the response of Qd or Qs to marginal changes in price. • This is called point elasticity. • The formula for calculating point elasticity where Q = f(P) is • Ep = (dQ/dP)*(P/Q) • Example: • Demand for Detroit Lions tickets is given by Qd= 100 – 2P • At a price of $40 per ticket, what is the price elasticity of demand? We want the price elasticity at this precise point The slope of a linear demand curve is constant  it’s dQ/dP  So, Ep = dQ/dPx P/Q = -2 (40/20) = -4 Drop the Minus sign, so Ep = 4 which is greater than 1 Therefore demand is elastic. à Asmall change in price = a proportionately larger change in Qd for Lions’tickets • Since demand is elastic, if the Lions want to increase ticket revenues, they should decrease ticket prices. ß sell at a lower price but sell significantly more, therefore total revenue goes up • If demand had been inelastic, to raise ticket revenues, they should increase ticket prices. So, how do we use our knowledge of demand, supply, equilibrium and elasticity to explain why a Vezina rookie card is more valuable to collectors than a Gretzky rookie card? • First, let’s look at the supply side. • Afixed number of both cards was produced, so the actual supply of both cards is perfectly inelastic (a vertical supply curve positioned at the number of cards produced for sale). • The market supply, however, will be inelastic. • Owners of cards may be more willing to sell them the higher the price they can get. c55 Georges Vezina Graded Rookie Hockey Cards • Originally, hockey cards in Canada were produced by Imperial Tobacco Company and were much smaller than today’s cards. They were issued in cigarette packages. • 45 cards were produced in Vezina’s rookie year, and given that he tragically died of tuberculosis and the NHL Goaltending Trophy bears his name, his card is
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