Introduction

1. Introduction Here we just raise some questions without answers, as well as point out some ideas we may encounter later.

2. Some interesting questions raised in an economics of sports setting (at least some say the questions are interesting): 1) Should cities build stadiums for their local professional teams? 2) Are professional athletes paid too much? 3) Why did the NHL cancel the 2004-2005 season? 4) Why did the owners of the Houston Texans pay $700 million to join the NFL (the answer is not to make the lives of Bengal fans miserable). By the way, in 2008 (according to Forbes Magazine) the 4 major pro sports in the USA had revenue of only $19.09 billion. This does not even place the combined 4 into the top 100 revenue generating firms in the USA. In this sense sports are small potatoes.

3. When the authors of our text use the phrase sports industry they are referring to pro football, basketball, baseball and hockey along with individual sports golf and tennis and intercollegiate sports and Olympic events. After a review of basic economic models we will study the areas of industrial organization, public finance and labor economics in the context of sports. Industrial Organization is the study of firms in markets as they relate to employees, consumers, government and each other. A focus is on the ability of firms to maximize profit. Public Finance is the study of how governments provide goods and services and of the ways that governments pay for them. Labor economics is the study of how labor markets determine the level of employment and salaries.

4. The use of models Why do pro teams have a bobble head day? Probably to get more fans at the game. The bobble head is a model of the real player. In econ we use models to try to understand what is really going on. When we model we make assumptions about the nature of the world. A weak assumption is likely to be true much of the time. A strong assumption is probably not true and may be risky to assume. Some have argued that assumptions can be strong or weak, but what makes a good model is its ability to predict and explain behavior that you and I observe in the world.

5. Positive and Normative Economics Consider the following two statements: If the vendors at the stadium heat the popcorn kernels they will pop into popcorn. The vendors at the stadium should make popcorn. The first statement is called a positive statement and by that we mean it is an objective statement about “what is.” The second statement is called a normative statement and by that we mean there are subjective values included about “what ought to be.” In economics, and other areas of study, the science is usually about the positive aspects and then in the public policy arena we have the normative aspects.

6. Babe Ruth – why he switched from pitching to hitting The story here is one of comparative advantage.

7. Let’s say that in a production setting during each hour that you can make either 2 cookies or 3 pretzels. Also say that during each hour I can make either 1 cookie or 2 pretzels. It is obvious that in an hour you are better at both cookie making and pretzel making. When someone can produce more of an item than another in the same amount of time that person is said to have an absolute advantage in producing the item. You have an absolute advantage in producing both cookies and pretzels. Earlier in his career Babe Ruth was an outstanding pitcher. Maybe the best in his day. He was also an excellent hitter. Maybe one of the best ever. So, Babe Ruth had an absolute advantage in both hitting and pitching during the time he played baseball.

8. Let’s focus on what happens if each of us makes cookies. When you make cookies you can not make pretzels, and the trade-off is you give up 3 pretzels when you make 2 cookies. Another way to say this is that each cookie you make means you give up the ability to make 1.5 pretzels. In this case we say the opportunity cost for you in making 1 cookie is 1.5 pretzels. Note for me the opportunity cost of 1 cookie is 2 pretzels. So, in cookie making you have a lower opportunity cost and thus it is said that you have a comparative advantage in cookie making. But, when the focus is on making pretzels, when you make pretzels you give up 2/3rds of a cookie for each pretzel made while I only give up 1/2 of a cookie for each pretzel made. So, I have a comparative advantage in making pretzels.

9. WOW, while you are absolutely better than me in both cookie and pretzel making, I have a comparative advantage in pretzels!!!! So, when you look back at the Babe Ruth story, we can now say Babe Ruth had a comparative advantage in hitting and thus it made sense for him to give up pitching. The team he would play for would be much better off with him as a hitter. In the cookie/pretzel example let’s say you and I can trade cookies and pretzels in the ratio 1 cookie = 1.75 pretzels (called the terms of trade). Since you have a comparative advantage in cookies you should make only cookies and then trade for pretzels if you want some. Here is why. If you want pretzels and you make them on your own you only get 1.5 pretzels per cookie you don’t make. But if you make cookies you get 1.75 pretzels for each cookie you trade.

10. Since I have a comparative advantage in pretzels I should only make pretzels and then trade for cookies if I want some. Here is why. If I want cookies and I make them on my own I only get .5 cookies per pretzel I don’t make. But if I make pretzels I get about .57 cookies for each pretzel I trade. So, if each of us specializes in the item in which we have a comparative advantage and trades for the other item (as long as the terms of trade are good) each of us will be better off. The team that Babe Ruth played for was better off with him hitting because he had a comparative advantage in hitting. Remember that the opportunity cost of an activity is the value of the next best alternative that can not be done and the idea is used in understanding comparative advantage.