Lesson 1:
Teams are the firms, sports league acts as governing agent
Player talent - natural resource (born with)
Player skill - developed over time, additional resource
Principles of microeconomics
1. people face tradeoffs - there’s always resource being used (money, time, materials)
2. Opportunity cost
3. Rational consideration - rational people will consider marginal costs and benefits
4. People respond to incentives - when a situation changes, people will change it
5. Perfefctly competitive markets are the most efficient - in reality harly any are perfectly
competitive, instead theres a range of monopolistic and ogliopolistic
6. Source of market imperfections include market power and market failures - a central planner
could (theoretically)correct market failures and improve efficiency
Scarce resources: money, talent, fans, time
decisions : where/how to play, who to play with / against
Professional sports leagues can be traced back to the 19th century
-​ Profit maximization has always been applied. But, since the early 2000s decision making
shifted from being qualitative to quantitative - due to the changes in society
1st sports econ study was in 1956 by Simon Rottenberg - “the baseball players labour market’
(journal of political economy) explored how variations in city size effects the markets for teams /
players
-​ Also looked at the market powers of teams to force players to take contarcys below their
value.
-​ The first method of estimating player valuations was developed by geral scully in 1974
Bill james baseball abstract
-​ Analyzed baseball stats each year, used method now known as sabermetrics
(SABRmetrics for the society of american baseball research - initially used for the
oakland athletics in the 1990s
MLB
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30 teams, 15 in the american league, 15 in the national league - both follow a single
rulebook (now)
NBA - 30 teams
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Split into eastern and western conferences but there arent any administrative differences
so we treat it as one league
NFL - 32 teams, 2 conferences american football conference and the national football
conference - developed from two separate independent leagues (like baseball) so we evaluate
them as separate entities even though theyre - now - part of the same league
NHL - split into conferences for scheduling but is one league bc of no admin differences 32
teams (+ 1 inactive team - coyotes franchise, currently suspended)
“The big six”
-​ The big four
-​ CFL - 9 teams
-​ MLS - 30 teams
Dealing with the exchange rate causes a problem for canadian teams
-​ Revenues earned are a mix of USD and CAD
-​ player salaries are denoted in USD,
-​ Player salaries are negotiated in USD and paid in USD. Canadian teams face exchange
rate risk - the revenues (of CAD teams) are much more volatile in USD which adds an
additional constraint on canadian teams
Gross domestic product
GDP= C + I + G + X - IM
-​ Changes in overall orice level are measured using an index, such as the GDP deflator/
consumer price index
-​ An index is the weighted average of all price changed for a representative bundle of
goods
Until 1914 the CAD and USD were pretty close
1. NFL revenues have grown faster than any other league, 177% larger than in 2000 ( with only
adding one new team)
-​ Most dominant league in sports (revenues sit around 21B)
2. NBA - also added one team - grown 165% since 2001
3. NHL increased its revenues byu 146% in real terms (adjusted for inflation) (only big four
league to contract a franchise in 2014)
4. MLB increased 90%, hasnt had a new team in this century
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GDP has only grown 62% since 2000
Franchise model is what's used in the Big 4
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Unlike in other industries, the franchisor (league) is owned by the franchisees (team
owners)
This relationships gives the franchisees (owners) more power over their own
organization and influence over the economic outcomeof the sport
Mean - measure of the ‘centre” of the data
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AKA the average / expected value
Mean can be influenced by outliers
Median - the value which divides the data into two equal halves - 50% above the median and
50% below
We can also measure of spread out a data distribution is using the range
range=max value - minimum value
-​ If we measure the range of wins, it tells us about the performance inequality between the
best and worst team
We also want to know how far away each team is from the average
The difference between the teams actual number of wins and the avg number of wins is called a
deviation from the mean
1.​ Find individual deviations
2.​ Square the results, divide by n-1
The standard deviation tells us about the spread of the data, the bigger than S the more spread
out our data will be
Approx 68%+ of our observations will be within one Standard deviation of the means, 95% will
be within 2, 99.7% will be within 3
Part 4: supply and demand
The law of demand states that holding everything else constant) an increase in price will reduce
the quantity demanded while an decrease in the price will increase the quantity demanded
-​ Tells us the demand curve us downward sloping. This relationship is caused by the
substitution and income effect
-​ Substitution effect: when the price of one good rises relative to other goods, consumers
will switch and buy the other good instead
-​ Income effect: when the prive of a good rises they cant afford to buy as much as they
could before with a fixed amount of income
When the price goes down, we move along the demand curve
-​ If another factor affecting the consumers decision changes, the demand curve will
change position - demand curve shifts out/inward if
-​ Increase in income
-​ an increase in the price of a substitute good
-​ A decrease in the price of complimentary good
-​ Increase desire for the good
-​ Increase in population \
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Improved expectations of the future
Ceterus paribus (all else equal): the condition that the demand curve is drawn assuming that all
other factors affecting a consumers decision, expect for price, stay the same
Factors that cause the supply of a product to increase at all prices - the s curve shifts outwards
-​ Input prices decrease
-​ Production technology improves
-​ alternative , cheaper inputs become available
-​ The number of firms in the market increase
-​ Expectations about the future improves
Any factor that causes supply to increase will cause the price to fall and will cause the quantity
sold to rise
Equilibrium price = quantity sold - free market will always lean towards equilibrium