Exam 1 Flashcards
- Why do some feel America’s preoccupation with sports is unhealthy (6 reasons)?
1. High School emphasis on sports o No correlation between education and GPA 2. Focus on winning 3. Little chance of going pro 4. Sports are a priority in college 5. Cover-Up crimes 6. Salaries
- Why is it that fans perceive that the game is all about the money?
o Players changing teams to get a bigger check
o Team re-location
o Amount it costs to build stadiums
- When it comes to assessing the value of sports, what elements cannot be quantified (3 elements)?
When the city celebrates a championship
- Why do sports generate so much more news coverage than other industries (3 reasons)?
o They are small industries
o Many cities/countries define themselves based on their sports teams
o To assist in progressing political goals
- Define “economics”
a. The study of choices based on scarcity
- What are the four limited resources in sports?
a. Roster size, limited capital (salary cap (how much you can allocate to each player) and luxury tax), limited # of games, # of teams
- Define opportunity cost
a. What you give up to do something else
- Define law of increasing opportunity cost
a. The more you decide to do something, the more you must give up
- Define marginal benefit, marginal cost and marginal analysis.
a. Marginal Benefit (Marginal Revenue) – How much that product revenues
b. Marginal Cost – Cost per player
- What are the assumptions used with the production possibilities curve (in the context of sports)?
a. Fixed roster size, number of teams, number of games, and capital
i. If we change any of these, the curve will shift in/out
A. Team rebuilding
Rebuilding for the future
B. Win-maximizers
Focused on winning today
C. Profit-maximizers
Focused on making money, not as much on winning
D. Under-performing
The worst spot to be. You spent the money to put the team together and it didn’t work
E. Tanking
The teams that deliberately lose to get a better draft pick. Mainly in the NFL
- Define the production function, marginal product and total product.
a. Production functions show how much output a firm generates from its inputs
b. MP – Output of each player
c. TP – All MP added together
- What is meant by ‘diminishing marginal returns?’
a. When output produced diminishes because there are too many workers
b. Marginal product is going up, while marginal returns is going down
c. When you add a variable resource (players) to a fixed resource (roster size)
- Define marginal cost and marginal revenue
a. MC – Cost per player
b. MR – Revenue per player
- When does a firm achieve profit-maximization?
a. MR = MC
What is output in sports
o Tickets sold
o Players adding wins
What inputs to use
o Players performance
o Historical stats
o Players ability
Impact of managerial/coaching quality
o Impossible to measure
o Could Golden State do what they do without their coach…we don’t know
o Coaching is more important in NFL and MLB
Total product
All wins
Marginal product
Per player wins
Marginal cost
Cost per player
Marginal revenue
Revenue per player
- Know the difference between correlation and causation.
a. Correlation – When two things relate that show a relationship
b. Causation – A causes B
- Be able to interpret the correlation coefficient.
a. Positive correlation – Both A and B go up
b. Negative correlation – Both A and B go down
c. Closer to 0 means less related
- Why is there a small correlation between payroll spending and winning percent in MLB? NFL?
a. Because of the minor leagues where they do not pay players much, but still get training
b. Arbitration – the contracts are decided by the arbitrator in the MLB, so a player can be paid more than they are performing
c. You cannot buy wins in the NFL; almost no correlation between player spending and winning
d. There are too many players involved in the game to attribute winning to any group of players. It’s a true team sport
e. Injuries in the NFL are very random
f. NFL has the lowest marginal product
- Why is there a higher correlation between payroll spending and winning percent in the NBA?
a. The one league that you can effectively buy wins
b. One player can affect the game more significantly
c. NBA has the highest marginal product
a. Elastic demand
i. Price has a strong effect on demand (price sensitive)
ii. Ed = % change in Q > % change in price
1. Price goes up by 5%, quantity decreases by 10%
2. Prices go up, revenue goes down
3. Coefficient is greater than one
b. Inelastic demand
i. Price has little effect on demand (price insensitive)
ii. Ed = % change in Q < % change in price
1. Price goes up by 5%, Quantity will increase by 2%
2. Prices go up, revenue goes up
3. Coefficient is less than one
c. Unitary point / revenue maximization point (Pt)
i. If prices go up by 5%, then sales will go down by 5%
ii. % change in Q = % change in price
- Be able to interpret the elasticity coefficient.
a. This includes understanding how elasticity impacts total revenue
- Know the four determents of elasticity
a. Substitutability
b. Proportion of income
c. Luxuries vs necessities
d. Time
Substitutibility
i. Lots of substitutes = Elastic
ii. Few substitutes = Inelastic
b. Proportion of income
i. Large proportion of income = Elastic
ii. Small proportion of income = Inelastic
c. Luxuries vs necessities
i. Luxuries = Elastic
ii. Necessities = Inelastic
d. Time
i. Takes up a lot of time = Elastic
ii. Takes up small amount of time = Inelastic
- Why don’t profit-maximizing firms price in the inelastic range of the demand curve?
a. Because they have nothing to gain by charging more, they are already maximizing profit
- Explain the five reasons teams may price in the inelastic range:
a. Sportsman hypothesis
b. Public choice hypothesis
c. Habitual consumption hypothesis
d. Pricing variables
e. Complementary revenue sources (TV, concession, etc.)
a. Sportsman hypothesis
i. They will price tickets in the inelastic range of demand in order to pack the stadium
b. Public choice hypothesis
i. We will price tickets low for political consideration
1. Ultimately new stadiums are paid for by taxpayers so they need to please them
c. Habitual consumption hypothesis
i. You are lowering ticket prices in order to build a fan base
d. Pricing variables
i. Sports teams are privately owned so teams don’t have to share how much tickets actually cost
e. Complementary revenue sources (TV, concession, etc.)
i. The TV revenue by most leagues is extremely high
Diminishing marginal returns is best stated as:
As additional players are added to the roster, the marginal product of each new player will eventually start to decline.
Distinguish between absolute advantage and comparative advantage:
Comparative advantage you can produce at the lowest opportunity cost and absolute advantage nobody produces better than you.
Which of the following best describes commonality?
Fans sharing a common interest in sports
Law of increasing opportunity cost states:
The opportunity cost increases as the quantity of a good produced increases.
In the context of a team s roster, which of the following best describes the production function:
Additional wins from adding another player to the roster.
Which of the following best fits the definition of marginal revenue?
The additional revenue received by the addition of one more player.
Which of the following is constant with the definition of economics:
The allocation and use of scarce resources to satisfy unlimited human wants
Which of the following is not one of the limited resources in sports:
Amount of revenue a franchise can earn.
How is marginal product defined in the context of sports?
The added wins by the signing of each player.
Why do some consider the emphasis on winning as unhealthy (in schools)?
Sports should be teaching teamwork, sacrifice and discipline
- What is the law of demand?
a. Other things equal, as price falls, the quantity demanded rises
- What factors lead to the downward sloping demand curve (explain each)?
a. Price acts as an obstacle to buyers
b. Law of diminishing marginal utility
The more you consume a product, the less satisfaction you will get out of it
c. Income effect and substitution effect
Income – as prices drop, our income will go further
i Substitution – If there is a similar option at a lower price, you will buy that
- List the factors that distinguish sports from other businesses.
a. Monopoly –> monopolistic TV rights
b. Territorial rights
c. Fans attention –> based on competition
d. Fans emotional relationship to the team
e. Player contracts
f. Stadium lease agreements
- In the context of sports, what product is being demanded from fans, networks, communities, and corporations?
a. Fans - Self-gratification by watching, listening, or attending the game
b. Networks – Program options are being demanded (live broadcasting)
c. Communities – Economic Impact
d. Corporations – Looking for a place to entertain clients, build brand loyalty,
- Define the Basking-In-The-Glory (BIRG) theory.
a. The fans associate that they had something to do with the team winning. This drives the emotional attachment
- What is the difference between relative quality and absolute quality?
a. Absolute – The level of talent on display
How good the players overall
MLB vs. triple A
Paying more for higher level talent
b. Relative – The competitive balance (comes after absolute quality)
Playoff games, high quality opponents, weekend games all raise prices
- Why does MLB view gambling as more of a threat to the league than steroids?
a. Because of Congress’s’ threat to yank their legal monopoly status
b. With a player on steroids, it doesn’t have an impact on relative quality because steroids don’t guarantee wins
c. With gambling, the player will bet that their team will lose because it is much easier to lose a game on purpose. This does decrease relative quality
- Explain ‘uncertainty of outcome hypotheses’ (UOH).
a. The predicted result of the game impacts our desire for the game
b. NCAA: Pregame: Consumers prefer games with a clear winner
c. However, fan interest does increase as the score of the game comes closer
d. Fans are willing to pay more for higher absolute quality
NCAA: Non‐automatic quality schools have lower TV ratings regardless of FBS rating
- Define/explain the two types of demand.
a. Derived – The event is an input into the final product
Networks –> sports are an input in generating ad revenue
Sponsors –> sports are an input in gaining brand loyalty
Organizations –> use sports to generate licensed merchandise
1. Fantasy sports –> use sports to generate revenue (would not exist without sports)
2. Sports betting
Stadiums –> use sports to sell tickets
The government –> use sports to stimulate economic activity
The media –> use sports for news
b. Direct - We are actually viewing the event
- List the determinants of demand and how they may impact the demand curve.
a. Team loyalty
b. Bandwagon effect
c. Conspicuous consumption
If you are offered tickets in a suite or sidelines to a game that you have no interest in, you still go
Opportunity cost of attendance
What you are giving up in order to attend the game
- Travel time, money, etc
Change in the number of buyers
When a team moves cities
f. Change in income
More income that you have, the more likely you are to go to games (Inferior/normal goods)
g. Change in price of related goods
Complements and substitutes
h. Change in customer expectations Quality of viewing Uncertainty of outcome Expectations 1. Future prices
Distinguish between direct demand and derived demand.
Correct Direct demand is viewing the events live or on TV while derived demand is when the sporting event is an input into the production of another good.
Why do leagues view gambling as more of a threat to the league than steroids?
Correct Gambling impacts the relative quality of the game.
The opportunity cost of attending a game could include:
Correct Travel time required to attend the game
Which of the following is NOT a determinate of demand?
Correct Number of home games
B.I.R.G is best described as?
Correct Fans increase utility by associating with winning teams.
Which game would have the highest ticket prices?
Correct A game with high absolute quality and relative quality.
A direct substitute would be?
Correct Watching the event on TV instead of attending the game.
All of the factors below distinguishes sports from other businesses, except?
Correct The high payroll of sports teams.
The uncertainty of outcome hypothesis is best defined:
Correct Fans prefer a game when their team has just over a 60% chance of winning.
