Sports Economics: An Introduction to Markets, Costs, and Revenues

Sports Economics: An Introduction

Sabrina Auci
University of PalermoWhat does economics in general deal with?
. Even those unfamiliar with this subject will probably have an idea of the topics
that economics deals with.

An initial, albeit representative and partial list might be as follows:

• markets, demand, supply, competition, monopoly
• labour, enterprises, production
• unemployment, inflation
• public spending, taxes, public debt, pensions
• multinational companies, globalisation
• sport, entertainment, theatres, media programming
• etc.

Sports Economics - Introduction
2Arguments are not enough
. However, this list (even if enriched) is not sufficient to define economics.
. It is not only economics that deals with these issues, but also:

• other disciplines (sociology, law, etc.):
• social actors (companies, banks, trade unions, etc.)
• institutions (local, national, international)

. It is necessary to specify the point of view and the method with which
the economist studies these subjects.
Sports Economics - Introduction
3Thinking like economists

• Economics is
• The study of how individuals make choices under conditions of
  scarcity and the effects that the results of those choices may have
  on society, as well as the interactions between individual choices.
• Cost-benefit principle
• An individual (or a firm or a society) should undertake an action if,
  and only if, the incremental benefits are at least equal to the
  incremental costs.

Sports Economics - Introduction
4The role of economic models (I)

• To study reality and understand human relationships, economists
  use a simplified (and stylised) representation called:
  Theoretical Model
• A model eliminates all details deemed unimportant in order to
  focus on the essentials.
• In economics, models often use graphical representations (on
  Cartesian axes) and mathematical formalisations (e.g. equations).

Sports Economics - Introduction
5The role of economic models (II)

• Economists use the cost-benefit principle as a basic principle to
  develop theoretical models to study how choices between
  conflicting alternatives made by a theoretically rational individual can
  affect other individuals and society more generally.
• Theoretical models are assumed to be based on three basic
  principles:
• Principle of scarsity
• Principle of known information
• Principle of rationality

Sports Economics - Introduction
6Basic principles: scarcity

• Resource scarcity occurs whenever, given the needs of a society at
  a given time, the means available and goods to satisfy those
  needs are insufficient.
• As a result of scarcity, societies, institutions, organisations and
  individuals are almost always forced to choose between scarce
  ends and means available for alternative uses within a limited set
  of possibilities.
• Scarce things become the object of economic activity and acquire
  a value (price).

Sports Economics - Introduction
7Basic principles: known information
. It is assumed that all data, such as prices and available
technologies, are known and available a priori to both
firms producing goods and consumers buying them.
Sports Economics - Introduction
8Basic principles: rationality

• A fundamental principle on which most economic analysis is based
  is the rationality of choice.
  . This amounts to assuming that economic agents behave
  rationally and are fully capable of assessing the costs and
  benefits of each possible alternative.

Sports Economics - Introduction
9Further basic principles: opportunity cost

• The opportunity cost of something is what you sacrifice to get it.
  . The idea behind opportunity cost is that the cost of one item is the lost
  opportunity to do or consume something else;
• Opportunity cost is the foregone benefit that would have been gained
  from an option other than the one chosen.
• Briefly, opportunity cost is the value of the next best alternative when
  choosing an action.

Sports Economics - Introduction
10Further basic principles: Pareto efficiency

• An allocation is Pareto efficient if it is impossible to reallocate resources such
  that one person can be made better off without making at least one other
  person worse off.
  . In other words, it is a situation where no further improvements to society's well
  being can be made through a reallocation of resources that makes at least one
  person better off without making someone else worse off.
• If resources are not allocated in a Pareto-efficient manner, then it would be
  possible through reallocation to provide more of some good(s) to at least one
  person, making that person better off, without making any other person feel less
  well off.
  . An immediate corollary is that the government should pursue all Pareto-
  superior allocations.

Sports Economics - Introduction
11The economic analysis

• Economics is the study of the economic behaviour of agents and their aggregation
  within a society, focusing on interactions in markets:
• Consumers
  Families
• Unit of production
  Firms or banks
• Markets
  Resource allocation (Government)
• Tools: Charts and graphs are often used to understand the complex of phenomena
  that govern exchanges between agents.

Sports Economics - Introduction
12The economic analysis

• Economics is divided into two main sub-disciplines:
• MICROECONOMICS
• It focuses on the individual dimension of several economic decisions under
  conditions of scarcity such as the choice of a consumer, the choice of a firm, the
  functioning of a given market, the determination of a price, etc., and the effects of
  those decisions on prices and quantities in specific markets.
• MACROECONOMICS
  . It studies the functioning of the economic system as a whole, such as national
  product, unemployment, inflation, etc. and the policies that governments can adopt
  to improve it.

Sports Economics - Introduction
13Real and financial market flows

Government and Markets

Purchases of goods and services
Firms
securities markets
Families
Real Economy
Income from labour
and capital
Credits and deposits
Banks
Government
Financial Economy
Central Banks
Public debt financingGovernment and markets

• Periodically, when major economic events attract public attention,
  academics and policymakers question the role of the Government
  within the free market hypothesis.
• The debate aims to understand the extent and nature of
  government intervention within market mechanisms.
  . At the extremes of this debate are, on the one hand, defenders of
  state intervention and on the other, economists with a liberal
  orientation.

Sports Economics - Introduction
15The two positions

• Defenders of government intervention
  1) The outcome of market allocation by leaving agents to act alone may be socially
  unacceptable.
  2) The market, left to itself and free to follow only its own rules, works badly.
  Thus, government intervation is required.
• Defenders of the market
  1) Efficient functioning of markets
  2) Ability to increase welfare of agents
  3) Moral qualities (e.g. meritocracy)
  Thus, government intervation is not required

Sports Economics - Introduction
16Origin of liberalism: Adam Smith
. The historical father is Adam Smith, who in 1776 published a text
that is considered to be the birth of the science of economics,
"The Wealth of Nations".
. The book was born in the climate of the Enlightenment and
represents the economic version of the liberal ideas that were
becoming established in political thought.
. Among the many ideas proposed by Smith, one was particularly
successful: the famous metaphor of the 'invisible hand'.
Sports Economics - Introduction
17The invisible hand metaphor

• The metaphor of the invisible hand underlies the liberal view of the
  market.
• The market, as if guided by an invisible hand, when left to operate
  according to its own logic, achieves an unexpected and at the
  same time desirable result:
  it maximises the wealth of society.
• This result is achieved without anyone explicitly pursuing a collective
  goal. On the contrary, the collective goal is achieved through the
  selfishness of the individual.

Sports Economics - Introduction
18Pratical implications

• The implication of this assumption is all too obvious:
  The market works well when it is left free to do as it pleases
  (hence the famous expression 'laissez faire').
  . Therefore, not only does the market not need any help, it only needs to be freed
  from obstacles and regulations that impede its action.
• On closer inspection, it is interesting to note that in this last consideration we
  find an argument that is still often used today in support of the market:
  The market must be left free, it must not be caged.

Sports Economics - Introduction
19Origin of government intervention
. The theoretical founder of the role of the government within the market is
John Maynard Keynes, who published the "General Theory of Employment,
Interest and Money" in 1936.
. The innovative idea is that the role of the government is fundamental. In fact,
according to Keynes, the market can produce sub-optimal results and the
role of the government is to help the market.
. The role of government is, on the one hand, to dampen and control economic
cycles and, on the other hand, to bring the market to a better situation
(especially in terms of unemployment) than the market could achieve on its own.
Sports Economics - Introduction
20Why economics and sports? (I)

• As interest in sport has grown throughout the world, so too has its
  economic importance.
• Sports occupy a unique position in the human psyche. Athletic contests
  around the world have long been a way for individuals, institutions, cities
  and nations to define themselves.
• Sport can bring out the best and the worst in people. For example,
  cities feel that they have achieved big-time status when they attract an
  international competition (as the Olympic games). At the same time,
  violence between major factions increases in cities where there is a
  football match, for instance.

Sports Economics - Introduction
21Why economics and sports? (II)

• Sport can be considered as a good that provides
  psychological and physical benefits to consumers and,
  like all goods, is traded on a market where supply and
  demand meet.
• This market has specific characteristics that require
  special analysis.

Sports Economics - Introduction
22