Something has just occurred to me: many of you don’t know what sports economics is. And I go on about it – A LOT.
I did tell you that this year (well, this blog year) I would make this blog more about economics and to start, we’ll do a rundown of what sport economics is.
Economics as an area of study (Smith College, REPRESENT!) focuses on the production, consumption and allocation of resources. Usually, that means money in exchange for goods or services. The same goes for sports economics although, ‘resources’ is a bit more specific – primarily those resources are games, players, fans, coaches, sponsorships… and everything else you think of when you think of sports. Sport economics uses the principles learned in general economics (usually microeconomics) and apply them to sport.
Let’s get down to business and start with the 10 principles of economics and how they apply to sport, and what I am interested in.
1. People face trade off. Trade-off is, as I’m sure you know, what you give up to get something else. This is also known as opportunity cost – which we’ve talked about before. With sport, it can be how a player or coach chooses what team to work with, how fans decide their choice of entertainment (sports event versus movie versus home… like I said, we’ve talked about this before). This can help clubs decide on pricing of tickets or what salary or package to offer players or coaches.
2. People respond to incentive. You know this as a person – you’re more likely to do something if you’re going to get something out of it. Sports teams will likely use this to see how to attract fans. What can you offer fans to get them to your games? … for example.
3. Rational people think at the margin. Oh, marginal cost and marginal value. We’ve talked about that before a bit, as well. As a refresher, marginal value: what you gain by adding one more unit of a resource. Marginal cost: what that one unit costs. And rational people only add another unit if the cost is lower than the benefit. This also incorporates law of diminishing returns, which states that you get the most value from your first unit, slightly less from your second, even less from your third… etc. In sport, think of players. If you’re an AFL team, you need a ruckman. The first ruckman you get is nearly invaluable. The second one, is very useful, but since you already had one they’re slightly less useful than the first. The third ruckman you get is not that valuable – you only have him for emergencies and he’s usually on the bench. The fourth ruckman you get is nowhere near as valuable as the first – he’s really only there for BIG emergencies. The fifth ruckman you get… not very valuable at all. Get it?
4. Standard of living increases with increased production. The more you produce, the better off you are. Basic macroeconomics. Same goes for sport. More wins = more members, more revenue = better players, better coaches, better facilities = more wins. What a cycle.
5. Free trade helps everyone. This one is a bit… controversial, even amongst economists. And in sport, they do not have free trade. Free trade, in this discussion, focuses on players. Contracts and CBAs prevent free trade. Are CBAs, free agency, and contracts with signing bonuses what are best for the league? Good question – that’s why we have sport economists.
6. Markets are a good way to organise economic activity. This says that markets determine what we produce and how much, as well as how much people pay for the goods and services. Applied to sport, teams can decide how much of a certain type of ticket they make available (general admission versus membership versus luxury boxes). It can also be applied to sponsorship – driving prices up when multiple companies what to sponsor a club.
7. Governments interference can make markets inefficient. When governments start to impose regulations, markets cannot do what they want to. That’s what a CBA is… a league putting regulations on things that (maybe) shouldn’t be regulated.
8. Supply and demand increase resource efficiency. Once you know what people want, you are able to accommodate their wants. You can get them the correct food at the concession stands, you can change ticket prices, you can establish events based on attendance, you can choose stadiums to accommodate large crowds… where should your money go and how much of it should go there?
9. Desires are infinite, resources are finite. You know this. You want everything – but you can’t have it all. So how should you allocate it? What should you trade-off for it? What is it worth to you?
10. There’s no such things as a free lunch. Someone has to pay. Same in sport – you have to earn your wins. What does it cost you? Money? Health? Injuries? Ever seen a guy take a ridiculous mark just to land on his ankle wrong and twist it? Yeah… no such thing as a free lunch.
And next time on Sports Economics 101… examples of what economists study, in relation to the 10 principles.