ABSTRACT

This chapter provides a refresher on basic economic models. Supply and demand are among the simplest but most powerful tools in the economist’s arsenal. If you have a clear understanding of which external forces affect demand and supply, then you can make accurate predictions regarding the direction of change in prices and output.

Firms produce output by combining inputs. If one input is held fixed, increases in the other input are eventually subject to the law of diminishing marginal returns. The marginal productivity of that input declines and, in turn, marginal costs rise. When markets are competitive, prices are lower and output is higher than if a firm has market power. Market power gives a firm the ability to set prices rather than simply accept the price as determined by the market. In most sports markets, teams have substantial market power. Costs and the distinction between fixed and variable costs play a vital role in the determination of output and prices. For professional sports teams, players’ salaries are often best treated as fixed costs, because they are unrelated to the number of games played.