By Ryan Fletcher Third Year, Runner Up Prize

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "By Ryan Fletcher Third Year, Runner Up Prize"

Transcription

1 Do sports stars deserve their wages? Should their governing bodies introduce a wage cap? By Ryan Fletcher Third Year, Runner Up Prize Introduction The salaries of sports stars are often of public interest as it is widely believed they earn too much, especially when compared to more socially valuable professions such as teaching. Furthermore, it is argued sports stars high salaries can be a cause of rising ticket prices, much to the frustration of the fan. Moreover, the competitive balance of the sport is likely to lean in favour of the rich teams, which can potentially create large inequalities within leagues, lowering competitiveness and thus having a negative effect on the spectacle of the sport. From the perspective of the fans, a league with lower competitive balance can be perceived as less entertaining as the uncertainty of outcome dissipates predictability does not make for entertaining sport. Likewise, the players themselves may be discontent with inequalities within the league, and look to move elsewhere. The labour market in professional sports, as in any other labour market, conforms to basic elements of supply and demand (Rosen and Sanderson, 2001). This gives reason as to why sports stars can earn disproportionally high wages, which is what this essay will seek to explain. Furthermore, it will evaluate the impact of wage caps, with reference to both European and North American leagues. It is important to note these league systems are different in organisation: in North America, leagues are closed ; no promotion or relegation takes places, whereas in Europe, an open or pyramid league system is used, where teams can be relegated and promoted depending on their final standings in the league. Much of the literature in sports economics assumes that clubs are of profit-maximising nature. However, it has been argued, namely by Quirk and Fort (1997), that models assuming profit maximisation are inappropriate and instead they suggest there is evidence that English, Scottish and Australian football and cricket clubs (as well as some American sports teams) should be modelled as utility- or win-maximisers. This can have an impact on the effectiveness of wage caps. Win-maximising clubs may pay larger salaries in order to attract the best talent, resulting in high team utility; a salary cap may, therefore, interrupt their wage structure. Profit-maximising clubs, on the other hand, may have a more efficient wage structure. This is intuitive as they would be seeking to minimise costs to obtain the largest possible profit, and therefore, a wage cap may impact less significantly on them. Why Do Sports Stars Earn So Much? The elusive box office appeal, as described by Rosen (1981), is an essential factor behind the huge wages of sports stars. The ability to attract large audiences and to generate many transactions increases the revenue of the sports star (or, the seller ). The talent of the sports star is what these huge audiences are drawn in by, and this is what causes such disproportionate wages. Imperfect substitution exists between lesser talent and greater talent, even if there is greater compensation in terms of quantity, which is illustrated by Dobson and Goddard s (2001) example from football, explaining how if one assumed

2 Manchester United were three times more talented than Birmingham City, watching Birmingham City three times would not equal watching Manchester United once. Additionally, wages can rise dramatically with only small increases in talent and this is known as an economic rent, created by the scarcity and thus low supply of exceptional talent (Rosen, 1981; Rosen and Sanderson, 2001). Further, Adler (1985) explains how stardom can exist, which can create a hierarchy of income even without any hierarchy in talent. In essence, this suggests that although there can be negligible differences in talent among some sports stars, their respective income can be vastly different. Adler (1985) uses music as an example to suggest that consumption requires knowledge; music becomes popular (and therefore, highly consumed) by many people listening to and discussing it with one another. To gain greater knowledge of the popular music, fans must forego knowledge of other artists, limiting the amount of stars that can exist within the field. The same may apply in sports. Consumers may actually bid up the wage of a sports star as their knowledge of them increases their popularity, which intensifies the manager or owner s incentive to have them on their team and may limit the labour supply of stars. This is consistent with Rosen (1981) and Rosen and Sanderson (2001) explaining how sports stars can receive a following that goes beyond their contribution to the sport. David Beckham could perhaps be an example of this phenomenon of stardom. He became extremely well-known, both on- and off-the-pitch, and although it is hard to measure quantitatively, it is apparent that fans and managers or owners alike recognise his stardom. Figure 1 shows the interaction of supply and demand in the labour market for professional sports, which determines sports stars wage and can explain wage differentials. Indeed, it shows how these superstar wages can be determined. Due to scarcity of talent and the stardom effect, it could be argued that players with these qualities are a monopoly, that is, their talent is so unique it has no effective substitute. Therefore, their supply of labour is inelastic; Figure 1 shows the extreme case whereby labour supply is perfectly inelastic. Consequently, these players wages are demand driven and thus they receive what is referred to as economic rents; regular players would receive the new competitive wage after an increase in demand for labour, whereas the monopoly players would receive the new monopoly wage (Downward and Dawson, 2000). As labour demand increases, their wages increase significantly; as it is assumed the market for talent is competitive, mangers or owners are expected to pay players based on their marginal revenue productivity (MRP), that is, the amount in which their input of labour increases revenue (Fort, 2006). Real wage rate Monopoly labour supply New monopoly wage Competitive labour supply New competitive wage Initial wage

3 Stars are deemed to have a greater MRP than regular players, resulting in wage differentials within teams. Scully (1989) calculated that strong Major League Baseball sluggers add $3.9 million, whilst strong pitchers can add $7.1 million (both in 2004 US dollars). It should be noted that these figures were for strong players as opposed to superstars; it can be assumed that superstars can contribute even larger amounts to revenue. However, sports stars MRPs may well be misinterpreted by managers or owners, resulting in inefficiently high wages that are not profit maximising for the firm (Kesenne, 2000). The stars impact on team productivity may not be as large as expected. An example in football could be that a team sign a star player expecting that his marginal product will enable the team to qualify for the Champions League. According to Deloitte (2013), Manchester United received 36.4 million in 2012 for their Champions League participation for broadcasting rights revenue, and in 2011, when they reached the final, they received 53.2 million. Clearly, a vast amount of revenue is received through Champions League participation and so star players at these clubs can have a large MRP. However, if the team fails to qualify the stars MRP would be significantly lower. Consequently, they may be earning a lot more than their actual MRP, which is inefficient in terms of profit maximisation for the club. Moreover, the social value of professional sports is frequently called into question. At a time when Wayne Rooney can earn a reportedly 300,000 per week for Manchester United (Rose, 2014), a teacher for example, may earn only one tenth of this per year. Yet society values education (and therefore, the work provided by the teacher) much more than they value the entertainment provided by Wayne Rooney on the football pitch. So why can his earnings exceed a teacher s by this amount? The answer is what Rosen and Sanderson (2001) describe as personal scale of operations effect. Simply put, a teacher can teach only a certain number of students at any one time. Although the unit value per student is very high, a teacher s income is constrained by the limited number of students they can teach. Conversely, although the unit value per consumer of sport is much lower, the number of consumers they can reach is far superior to that of the teacher. The marginal cost per consumer for a football team is effectively zero, whereas a teacher s marginal cost to teach one more student can be relatively large. Dobson and Goddard (2001) liken this production technology to public goods, whereby the production costs depend only very slightly, or not at all, on the number of consumers. Unlike a true public good though, individuals can be excluded from consumption by not paying a television subscription fee or purchasing a

4 match ticket. Rosen (1981) describes this as a scale economy of joint consumption, and suggests that it allows for relatively few sellers to effectively supply the whole market. He goes on to say that combining joint consumption technology and imperfect substitution of talent, makes it obvious that talented sportsmen and women will receive high wages. Additionally, wages in Europe can be bid up as teams are thought of as win-maximisers, and thus want to keep or attract the best players. The Bosman ruling, as approved by the European Union in 1995 (Kesenne, 2003), allows free labour mobility in Europe; players are willing to move to a different team (and country) if they are offered higher wages. Whether or not sport stars deserve these extremely high wages can be a matter of opinion. An economist would argue that, due to the scarce supply and high demand of their talent, their high wage is perhaps justified. The limitless number of consumers could further condone disproportionally high wages and to add to this, professional careers in sport are often very short. However, it will continue to be argued that sports stars earn too much. The lack of social value to their profession, and the ever increasing wages will no doubt provide ammunition for condemnation of the level of their earnings, as well as the (lack of) financial stability of various European clubs. Lastly, if the star players underperform, their MRP may decrease. Their wages would most likely be correlated with this, resulting in an inefficiently, and undeservedly high wage. The Economics of Wage Caps Pressure to introduce wage caps in professional sports may become intensified as various clubs financial stability becomes worrying as well as the amount of negative media coverage surrounding many sports stars wages. The obvious effect of these wage caps would be a lower average wage for sports stars but how will this affect the sport? The competitive balance can be affected; the club s profits, as well as the wage distribution within teams. According to Kesenne (2003), a key difference between wage caps in the closed leagues of North America and the pyramid system in European leagues is that in North America, the objective of the wage cap is to guarantee profits for the owner, and to maintain competitive balance, whereas in the European leagues, the objective is to lower wage bills in order to preserve financial stability. Of course, competitive balance may be enhanced in European leagues too, whether it is the governing bodies prerogative or not. Introducing wage caps in European leagues would have a different impact to North American leagues, due to their difference in organisation. Foremost, the heterogeneity of teams in European leagues would make it impossible to impose a standard absolute wage cap across all teams. This is because a typical Belgian first division team will earn approximately 13% of revenue generated by a typical English Premier League club. Instead, it is suggested that a percentage-of-revenue wage cap is used. Due to significant differences in revenue for different clubs within the same league, competitive balance may remain relatively unchanged (Dietl et al., 2012). This reflects Kesenne s (2003) theory that European wage caps are primarily to improve a team s financial stability.

5 However, Dietl et al. (2012) go on to say that for governing bodies in sport to be able to introduce wage caps, they must prove that such wage caps will improve clubs financial stability whilst not negatively affecting social welfare. Their analysis shows that a percentage-of-revenue wage cap increases competitive balance and club profits at the expense of a lower level of aggregate talent (p317). However, in order for wage caps in European leagues to be justified, it must be strictly clear that social welfare will not be reduced. Unfortunately, this is ambiguous as a significant determinant of this is fan preferences. Dietl et al. (2009) explain how fans can have different valuations for the aggregate talent within the league and the league s competitive balance. The overall impact on social welfare is dependent upon these valuations. To analyse the effect of salary cap, Kesenne (2000) uses a two-club model; a big-city club and a small-town club. A key factor in each club s revenue is the size of the market in which they operate, which both clubs cannot control. Win percentage is the next most significant factor in generating revenue, as people like to watch winning teams (however, this has a decreasing marginal effect because if the club become too strong, it will be detrimental to the competitive balance of the league). Revenue is a function of market size and winning percentage. The composition of players in a team affects its win percentage and it is assumed that regular players marginal product is a fraction to star players. Total league revenue may decrease as a result of the more balanced allocation of talent because, using Kesenne s (2000) two-club model, and by using percentage-of-wage caps as suggested by Dietl et al. (2012), star players will have a greater marginal revenue productivity at a big-city club than at a small-town club. This is because a big-city club will have a larger fan base and thus more potential revenue (transactions). Therefore, losses from the big-city clubs are not offset by the increase in revenue from the small-town clubs and so total league revenue and social welfare is decreased. However, competitive balance in a league championship is imperative to its quality. The uncertainty of the outcome in matches between teams is what makes it exciting and can directly contribute to revenue (Kesenne, 2000). Indeed, the effect of wage caps can be positive for the competitive balance and thus enhances the outcome uncertainty. Therefore, it is difficult to determine what impact competitive balance will have on the league in terms of revenue and social welfare. Furthermore, a widely argued point for wage caps is that they lower wage bills, which lowers a team s total costs, and this leads to lower ticket prices. In fact, it is suggested that this is not the case and that wage caps have no effect on ticket prices. The reason for this is that in the US, teams are often local monopolists, and can therefore set their prices at a profit maximising level. As previously mentioned, a team s marginal cost is (close to) zero due to joint consumption the number of fans in the stadium and watching on television does not raise additional costs for the clubs and therefore, ticket prices are independent of player wage (Kesenne, 2000). It could be argued that in Europe, some cities can have multiple clubs within it, but even in these duopoly or oligopoly markets, similar monopolistic price setting can occur. Of course, the practicalities of introducing wage caps even percentage-of-revenue caps are called into question. If one governing body, the Football Association (FA), for example,

6 were in favour of caps and wanted to implement them, they would have to ensure that governing bodies across Europe (and potentially across the world), also implemented them. Otherwise, the best players could migrate to other leagues that do not impose a cap on earnings and potentially receive higher wages. This would negatively impact the aggregate talent of the league, quite possibly to an extent that even the increased competitive balance could not offset in terms of losses in social welfare and league revenue. Conclusion In conclusion, sports stars wages are determined by supply and demand, like in any other labour market. By combining the lack of effective substitution for exceptional talent with joint consumption the large scale audiences sports stars can sell to with a marginal cost of zero their wages are inevitably high (Rosen, 1981). Such a high demand, but scarce supply for the best talent will intuitively inflate wages (Downward and Dawson, 2000). In addition, the revenue in which stars can generate further argues the case for their wages, as long as their MRP is not misinterpreted. The effectiveness of wage caps in professional sports is unclear. An important reason behind them is to improve competitive balance, however, the only plausible way of implementing them is to use a percentage-of-revenue wage cap (Dietl et al., 2012), which would allow the big teams with higher revenue to pay players higher than the small teams. Thus, it could be argued competitive balance would remain relatively similar. Next, the issue of social welfare can provide impracticalities of introducing wage caps. It is argued that, due to higher followings for big clubs, by trying to lower their competitive advantage may drive down their fans welfare, which is not offset by the increased welfare of small club fans. The result: lower social welfare, and potentially lower league revenues. Of course, a positive for salary caps is the potential for greater financial stability, especially in European leagues, where many teams are thought of as win-maximisers who pay inefficiently high wages to improve team productivity. In essence, although some sports stars wages are tremendously high, it would be difficult to find an economist who disagrees with how their wages are determined. The main issue is a moral one. Their wages supersede those in a much more socially valuable profession, such as teaching. However, is the issue of morality enough to enforce wage caps? Due to the impracticalities and ineffectiveness of them as discussed in this paper, their implementation would be of little value, except perhaps an improved perception of the industry s morals.

7 References Adler, M. (1985). Stardom and Talent. American Economic Review. 75 (1), p Deloitte (2013), Football Money League 2013, Sport Business Group. Dietl, H., Franck, E., Lang, M. and Rathke, A. (2012). Salary Cap Regulation in Professional Team Sports. Contemporary Economic Policy. 30 (3), p Dietl, H., Lang, M. and Rathke, A. (2009). The Effect of Salary Caps in Professional Team Sports on Social Welfare. B.E. Journal of Economic Analysis & Policy. 9 (1). Dobson, S. and Goddard, J (2001). The Economics of Football. Cambridge: Cambridge University Press. Downward, P. and Dawson, A (2000). The Economics of Professional Team Sports. London: Routledge. Fort, R (2006). Sports Economics. 2nd ed. New Jersey: Pearson Prentice Hall.

8 Kesenne, S. (2000). The Impact of Salary Caps in Professional Team Sports. Scottish Journal of Political Economy. 47 (4), p Kesenne, S. (2003). The Salary Cap Proposal of the G-14 in European Football. European Sport Management Quarterly. 3 (2), p Quirk, J. and Fort, R (1997). Pay Dirt: The Business of Professional Team Sports. Princeton: Princeton University Press. Rose, G. (2014). Wayne Rooney: Manchester United's forward's 70m deal. Available: Last accessed 27th Feb Rosen, S. (1981). The Economics of Superstars. American Economic Review. 71 (5), p Rosen, S. and Sanderson, A. (2001). Labour Markets in Professional Sports. Economic Journal. 111 (469), p Scully, G (1989). The Business of Major League Baseball. Chicago: University of Chicago Press.

Center for Research in Sports Administration (CRSA)

Center for Research in Sports Administration (CRSA) Center for Research in Sports Administration (CRSA) Working Paper Series Working Paper No. 35 Organizational Differences between U.S. Major Leagues and European Leagues: Implications for Salary Caps Helmut

More information

STATE UNIVERSITY OF NEW YORK COLLEGE OF TECHNOLOGY CANTON, NEW YORK

STATE UNIVERSITY OF NEW YORK COLLEGE OF TECHNOLOGY CANTON, NEW YORK STATE UNIVERSITY OF NEW YORK COLLEGE OF TECHNOLOGY CANTON, NEW YORK COURSE OUTLINE SPMT/ECON 313 - Economics of Sport Prepared By: Lorenda Prier SCHOO~ OF SCIENCE, HEALTH, AND CRIMINAL JUSTICE Sports Management

More information

CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition CHAPTER 13 MARKETS FOR LABOR Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary This chapter deals with supply and demand for labor. You will learn about why the supply curve for

More information

Annex 8. Market Failure in Broadcasting

Annex 8. Market Failure in Broadcasting Annex 8 Market Failure in Broadcasting 202 Review of the Future Funding of the BBC Market Failure in the Broadcasting Industry An efficient broadcasting market? Economic efficiency is a situation in which

More information

AS Economics Unit 1: Markets and Market Failure Syllabus, Key Terms & Charts

AS Economics Unit 1: Markets and Market Failure Syllabus, Key Terms & Charts AS Economics Unit 1: Markets and Market Failure Syllabus, Key Terms & Charts 10.1 The Economic Problem The Nature and Purpose of Economic Activity The central purpose of economic activity is the production

More information

PBL: MICROECONOMICS. Competency: Capital and Natural Resource Markets

PBL: MICROECONOMICS. Competency: Capital and Natural Resource Markets Competency: Capital and Natural Resource Markets 1. Describe how firms determine the quantity of resources to use and what determines resource supply in competitive markets and imperfectly competitive

More information

Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

More information

Perfect Competition. Perfect competition a pure market

Perfect Competition. Perfect competition a pure market We now move on to study the economics of different market structures. The spectrum of competition ranges from perfectly competitive markets where there are many sellers who are price takers to a pure monopoly

More information

1. Supply and demand are the most important concepts in economics.

1. Supply and demand are the most important concepts in economics. Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals

More information

Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition

Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition Chapter 7 In Between the Extremes: Imperfect Competition Learning Objectives List the five conditions that must be met for the existence of monopolistic competition. Describe the methods that firms can

More information

16 Monopolistic Competition

16 Monopolistic Competition Seventh Edition Principles of Economics N. Gregory Mankiw Wojciech Gerson (1831-1901) CHAPTER 16 Monopolistic Competition In this chapter, look for the answers to these questions What market structures

More information

THE MARKET OF FACTORS OF PRODUCTION

THE MARKET OF FACTORS OF PRODUCTION THE MARKET OF FACTORS OF PRODUCTION The basis of the economy is the production of goods and services. Economics distinguishes between 3 factors of production which are used in the production of goods:

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Chapter 29: Natural Monopoly and Discrimination

Chapter 29: Natural Monopoly and Discrimination Chapter 29: Natural Monopoly and Discrimination 29.1: Introduction This chapter discusses two things, both related to the fact that, in the presence of a monopoly, there is less surplus generated in the

More information

The Free Market Approach. The Health Care Market. Sellers of Health Care. The Free Market Approach. Real Income

The Free Market Approach. The Health Care Market. Sellers of Health Care. The Free Market Approach. Real Income The Health Care Market Who are the buyers and sellers? Everyone is a potential buyer (consumer) of health care At any moment a buyer would be anybody who is ill or wanted preventive treatment such as a

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

Monopoly. Monopolistic Competition. Competition. Economics. The Big Picture. Summary. Perfect Competition CHAPTER 16 CHAPTER 14 CHAPTER 15

Monopoly. Monopolistic Competition. Competition. Economics. The Big Picture. Summary. Perfect Competition CHAPTER 16 CHAPTER 14 CHAPTER 15 16 The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter 14) 2. Monopoly (chapter 15) 3. (this chapter)

More information

4 THE MARKET FORCES OF SUPPLY AND DEMAND

4 THE MARKET FORCES OF SUPPLY AND DEMAND 4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what

More information

Salary Caps in Professional Team Sports - Balancing Competition or Balancing Costs in the National Hockey League?

Salary Caps in Professional Team Sports - Balancing Competition or Balancing Costs in the National Hockey League? Powered by TCPDF (www.tcpdf.org) Salary Caps in Professional Team Sports - Balancing Competition or Balancing Costs in the National Hockey League? Economics Master's thesis Antti Lipasti 2015 Department

More information

Government intervention

Government intervention Government intervention Explain the term free market. In a free market, governments stand back and let the forces of supply and demand determine price and output. There is no direct (eg regulations) or

More information

Integrating the Input Market and the Output Market when Teaching Introductory Economics

Integrating the Input Market and the Output Market when Teaching Introductory Economics 1 Integrating the Input Market and the Output Market when Teaching Introductory Economics May 2015 Clark G. Ross Frontis Johnston Professor of Economics Davidson College Box 7022 Davidson, NC 28035-7022

More information

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

More information

Evaluating perfect competition and monopoly

Evaluating perfect competition and monopoly unit3 Chapter 6 Evaluating perfect competition and monopoly Evaluation is the most demanding of the four skills tested in the Unit 3 and 4 examinations. Evaluation is tested when answering part (c) of

More information

An Assessment of UEFA s Financial Fairplay Rules. Stefan Szymanski

An Assessment of UEFA s Financial Fairplay Rules. Stefan Szymanski An Assessment of UEFA s Financial Fairplay Rules Stefan Szymanski 1. Background 2. FFP rules 3. Assessment of objectives 4. Assessment of methods 5. Impact on Premier League 6. Conclusions Financial Stability

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

Chapter 5. Market Equilibrium 5.1 EQUILIBRIUM, EXCESS DEMAND, EXCESS SUPPLY

Chapter 5. Market Equilibrium 5.1 EQUILIBRIUM, EXCESS DEMAND, EXCESS SUPPLY Chapter 5 Price SS p f This chapter will be built on the foundation laid down in Chapters 2 and 4 where we studied the consumer and firm behaviour when they are price takers. In Chapter 2, we have seen

More information

Woodley Sports Football Club

Woodley Sports Football Club Woodley Sports Football Club Introduction Woodley Sports Football Club is currently playing in the Unibond Northern Premier League Division One, England. They are four levels down in the non league football

More information

1 Annex 11: Market failure in broadcasting

1 Annex 11: Market failure in broadcasting 1 Annex 11: Market failure in broadcasting 1.1 This annex builds on work done by Ofcom regarding market failure in a number of previous projects. In particular, we discussed the types of market failure

More information

Monopolistic Competition

Monopolistic Competition Introduction to Microeconomics Monopolistic Competition Introduction In this document we refer to imperfect competition as monopolistic competition. Monopolistic competition is described as the situation

More information

MONOPOLIES HOW ARE MONOPOLIES ACHIEVED?

MONOPOLIES HOW ARE MONOPOLIES ACHIEVED? Monopoly 18 The public, policy-makers, and economists are concerned with the power that monopoly industries have. In this chapter I discuss how monopolies behave and the case against monopolies. The case

More information

Economics 103h Fall 2012: Part 1 of review questions for final exam

Economics 103h Fall 2012: Part 1 of review questions for final exam Economics 103h Fall 2012: Part 1 of review questions for final exam This is the first set of review questions. The short answer/graphing go through to the end of monopolistic competition. The multiple

More information

LABOR UNIONS. Appendix. Key Concepts

LABOR UNIONS. Appendix. Key Concepts Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of

More information

An Exploration into the Relationship of MLB Player Salary and Performance

An Exploration into the Relationship of MLB Player Salary and Performance 1 Nicholas Dorsey Applied Econometrics 4/30/2015 An Exploration into the Relationship of MLB Player Salary and Performance Statement of the Problem: When considering professionals sports leagues, the common

More information

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

More information

Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

More information

Chapter 7: Market Structures Section 1

Chapter 7: Market Structures Section 1 Chapter 7: Market Structures Section 1 Key Terms perfect competition: a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices commodity:

More information

GCE. Economics. Mark Scheme for June 2011. Advanced GCE Unit F583: Economics of Work and Leisure. Oxford Cambridge and RSA Examinations

GCE. Economics. Mark Scheme for June 2011. Advanced GCE Unit F583: Economics of Work and Leisure. Oxford Cambridge and RSA Examinations GCE Economics Advanced GCE Unit F583: Economics of Work and Leisure Mark Scheme for June 2011 Oxford Cambridge and RSA Examinations OCR (Oxford Cambridge and RSA) is a leading UK awarding body, providing

More information

Investing in Local Training of Players

Investing in Local Training of Players Investing in Local Training of Players A. Political questions 1. Why is UEFA making these proposals? Over the last few years, UEFA has identified a number of problems that threaten to damage long term

More information

Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly

Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly www.edupristine.com Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly Prerequisite Characteristics of different market

More information

I. Features of Monopolistic Competition

I. Features of Monopolistic Competition University of Pacific-Economics 53 Lecture Notes #15 I. Features of Monopolistic Competition Like the name suggests, a monopolistically competitive industry has features from both a monopoly market structure

More information

Unit 5.3: Perfect Competition

Unit 5.3: Perfect Competition Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,

More information

Econ 111 (04) 2nd Midterm A

Econ 111 (04) 2nd Midterm A Econ 111 (04) 2nd Midterm A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following does not occur in perfect competition? A)

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 16 - Monopolistic Competition and Product Differentiation Fall 2010 Herriges (ISU) Ch. 16 Monopolistic Competition Fall 2010 1 / 18 Outline 1 What is Monopolistic

More information

To what extent does the Barclay s Premier League have oligopolistic characteristics, and if so, does this make it an oligopoly?

To what extent does the Barclay s Premier League have oligopolistic characteristics, and if so, does this make it an oligopoly? Beall 1 To what extent does the Barclay s Premier League have oligopolistic characteristics, and if so, does this make it an oligopoly? Bob Beall I.B. Number: 3051 0001 3 February 2014 Word Count: 3,235

More information

Chapter 11 Perfect Competition

Chapter 11 Perfect Competition These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 11 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter

More information

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is 1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

More information

Answers to the Problems Chapter 7

Answers to the Problems Chapter 7 Answers to the Problems Chapter 7 1. a. To draw a graph of Jason s budget line, plot the number of DVDs on the x-axis and the number of spy novels on the y-axis. The budget line will go through the vertical

More information

AP Microeconomics Chapter 5 Outline

AP Microeconomics Chapter 5 Outline I. Learning Objectives In this chapter students should learn: A. How to differentiate demand side market failures and supply side market failures. B. The origin of consumer surplus and producer surplus,

More information

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets The Big Picture Chapter 13: The cost of production Chapter 14-17:Look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter 14) 2. Monopoly (chapter 15) 3. Oligopoly

More information

a) Policies to achieve efficient resource allocation and correct market failure Indirect Taxes CIE A-level Economics

a) Policies to achieve efficient resource allocation and correct market failure Indirect Taxes CIE A-level Economics a) Policies to achieve efficient resource allocation and correct market failure Indirect Taxes Indirect taxes are imposed by the government and they increase production costs for producers. Therefore,

More information

12 MONOPOLY. Chapter. Key Concepts

12 MONOPOLY. Chapter. Key Concepts Chapter 12 MONOPOLY Key Concepts Market Power Monopolies have market power, the ability to affect the market price by changing the total quantity offered for sale. A monopoly is a firm that produces a

More information

CASE FAIR OSTER PEARSON

CASE FAIR OSTER PEARSON CASE FAIR OSTER PEARSON Publishing as Prentice Hall PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N Prepared by: Fernando Quijano w/shelly Tefft 2of 35 Input Demand: The Labor and Land Markets

More information

There are 10 Internal Credits AS 91401 V1 (3.3) 5 credits: Elasticity & micro-economic concepts Literacy

There are 10 Internal Credits AS 91401 V1 (3.3) 5 credits: Elasticity & micro-economic concepts Literacy Year 13 Economics Course Outline This course will cover the micro-economic issues of Market efficiency, Elasticity, Government intervention, Market failure and macroeconomic Influences on NZ economy. There

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

ADVANCED SUBSIDIARY (AS) General Certificate of Education Economics Assessment Unit AS 1. assessing. Markets and Prices [AE111]

ADVANCED SUBSIDIARY (AS) General Certificate of Education Economics Assessment Unit AS 1. assessing. Markets and Prices [AE111] ADVANCED SUBSIDIARY (AS) General Certificate of Education 2012 Economics Assessment Unit AS 1 assessing Markets and Prices [AE111] TUESDAY 12 JUNE, AFTERNOON MARK SCHEME 7395.01 General Marking Instructions

More information

Introduction to microeconomics

Introduction to microeconomics RELEVANT TO ACCA QUALIFICATION PAPER F1 / FOUNDATIONS IN ACCOUNTANCY PAPER FAB Introduction to microeconomics The new Paper F1/FAB, Accountant in Business carried over many subjects from its Paper F1 predecessor,

More information

Monopolistic Competition

Monopolistic Competition In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what

More information

GCE. Economics. Mark Scheme for June 2013. Advanced GCE Unit F583: Economics of Work and Leisure. Oxford Cambridge and RSA Examinations

GCE. Economics. Mark Scheme for June 2013. Advanced GCE Unit F583: Economics of Work and Leisure. Oxford Cambridge and RSA Examinations GCE Economics Advanced GCE Unit F583: Economics of Work and Leisure Mark Scheme for June 2013 Oxford Cambridge and RSA Examinations OCR (Oxford Cambridge and RSA) is a leading UK awarding body, providing

More information

Explaining Keynes Theory of Consumption, and Assessing its Strengths and Weaknesses.

Explaining Keynes Theory of Consumption, and Assessing its Strengths and Weaknesses. Explaining Keynes Theory of Consumption, and Assessing its Strengths and Weaknesses. The concept of consumption is one that varies between the academic community, governments, and between individuals.

More information

Economics Chapter 7 Review

Economics Chapter 7 Review Name: Class: Date: ID: A Economics Chapter 7 Review Matching a. perfect competition e. imperfect competition b. efficiency f. price and output c. start-up costs g. technological barrier d. commodity h.

More information

Review for the Midterm Exam.

Review for the Midterm Exam. Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make

More information

Football s foreign exchange: Challenging perceptions of foreign player involvement in the English Premier Academy League

Football s foreign exchange: Challenging perceptions of foreign player involvement in the English Premier Academy League Football s foreign exchange: Challenging perceptions of foreign player involvement in the English Premier Academy League Dr. Richard Elliott Centre Director Foreign players in England The increasing numbers

More information

Good Luck writing the Mock Exam!!

Good Luck writing the Mock Exam!! PASS MOCK EXAM FOR PRACTICE ONLY Course: ECON 1000 B Facilitator: Ben Dates and locations of mock exam take up: FRIDAY DECEMBER 11: 10 12 ME 3380 1 3 ME 3380 It is most beneficial to you to write this

More information

1. If the price elasticity of demand for a good is.75, the demand for the good can be described as: A) normal. B) elastic. C) inferior. D) inelastic.

1. If the price elasticity of demand for a good is.75, the demand for the good can be described as: A) normal. B) elastic. C) inferior. D) inelastic. Chapter 20: Demand and Supply: Elasticities and Applications Extra Multiple Choice Questions for Review 1. If the price elasticity of demand for a good is.75, the demand for the good can be described as:

More information

LESSON PLANS. Contents

LESSON PLANS. Contents LESSON PLANS Contents Total Instructional Time... 2 Lesson: Ticket Pricing... 3 Lesson: Stadium Staffing... 4 Lesson: Ingress & Egress... 5 Lesson: Parking... 6 Lesson: Concessions... 7 Lesson: Sponsorships...

More information

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.

More information

The Labour Market: Demand and Supply

The Labour Market: Demand and Supply The Labour Market: Demand and Supply Learning Objectives Understand that the demand for a factor of production such as labour is derived from the demand for the product and that it will be influenced by

More information

Chapter 6. Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

Chapter 6. Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter

More information

Football Lotto. www.lottonetwork.com

Football Lotto. www.lottonetwork.com Football Lotto Overview Who are Lotto Network? Lotto Network is a brand of MyLotto24 Ltd, part of the Tipp24 group of companies. Tipp24 is Europe s largest lottery broker and was established in 1999. It

More information

Topic 3.1a Short-Run Labour Demand. Professor H.J. Schuetze Economics 370

Topic 3.1a Short-Run Labour Demand. Professor H.J. Schuetze Economics 370 Topic 3.1a Short-Run Labour Demand Professor H.J. Schuetze Economics 370 Labour Demand Let s turn our attention away from employees to focus on the behaviour of employers or firms. Recall that labour demand

More information

Econ 201, Microeconomics Principles, Final Exam Version 1

Econ 201, Microeconomics Principles, Final Exam Version 1 Econ 201, Microeconomics Principles, Final Exam Version 1 Instructions: Please complete your answer sheet by filling in your name, student ID number, and identifying the version of your test (1 or 2).

More information

Brendan Wood Business Solutions GAMING MACHINES ARRANGEMENT REVIEW

Brendan Wood Business Solutions GAMING MACHINES ARRANGEMENT REVIEW GAMING MACHINES ARRANGEMENT REVIEW Do you think the venue operator model is meeting the three objectives listed and why? How do you think the venue operator model could better achieve its operations? Financial

More information

C A R I B B E A N E X A M I N A T I O N S C O U N C I L

C A R I B B E A N E X A M I N A T I O N S C O U N C I L C A R I B B E A N E X A M I N A T I O N S C O U N C I L REPORT ON CANDIDATES WORK IN THE SECONDARY EDUCATION CERTIFICATE EXAMINATION MAY/JUNE 2010 ECONOMICS Copyright 2010 Caribbean Examinations Council

More information

Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics

Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics 1. Introduction Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics Much of economic theory of the textbook variety is a celebration of the free market

More information

How do migrants impact the performance of teams in the English Premier League: does the composition of migrants have an effect?

How do migrants impact the performance of teams in the English Premier League: does the composition of migrants have an effect? How do migrants impact the performance of teams in the English Premier League: does the composition of migrants have an effect? Ryan Fletcher Labour Economics Introduction With 503,000 people immigrating

More information

PBL: Economic Analysis & Decision Making. Competency: Comparative Economic Systems. Competency: History of Economic Thought

PBL: Economic Analysis & Decision Making. Competency: Comparative Economic Systems. Competency: History of Economic Thought Competency: Comparative Economic Systems 1. Use basic economic concepts (e.g., supply and demand; production, distribution, and consumption; labor, wages, and capital; inflation and deflation; market economy

More information

AN OPINION COMPOSITION

AN OPINION COMPOSITION 1 AN OPINION COMPOSITION When you are writing an essay that asks you to discuss a topic or give your opinion on a question, it is important to organize your thoughts and present your arguments clearly

More information

Chapter 3:Externalities and Government Policy

Chapter 3:Externalities and Government Policy Reading: page 98~130 (Public Finance in Canada, David N. Hyman 10th edition) :Externalities and Government Policy Objectives: Define an externality and understand how such externality can prevent efficiency

More information

THE UNIVERSITY OF AUCKLAND

THE UNIVERSITY OF AUCKLAND THE UNIVERSITY OF AUCKLAND FIRST SEMESTER, 2013 Campus: City ECONOMICS Business Economics (Time Allowed: THREE hours) NOTE: Answer ALL questions Total marks = 100 PRACTICE PAPER ONLY This is a practice

More information

Why are New York Knicks tickets still so expensive even when they are playing poorly?

Why are New York Knicks tickets still so expensive even when they are playing poorly? Why are New York Knicks tickets still so expensive even when they are playing poorly? Dilemma The New York Knicks has the most expensive tickets in the NBA with the average price of a nonpremium seat costing

More information

What to look for in a

What to look for in a What to look for in a passive manager Passive management, or indexation, is often seen as a commodity product, where choices should be made on price alone. We do not believe this to be true. Here, we

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3

More information

Microeconomics Required Graphs and Terms

Microeconomics Required Graphs and Terms Microeconomics Required Graphs and Terms Understanding and explaining the economic concepts required by the AP and IB exams rests on a solid knowledge of fundamental economic graphs and terms. In order

More information

Chapter 1: Economics Foundations and Models...3. Chapter 2: Choices and Trade-Offs in the Market...7

Chapter 1: Economics Foundations and Models...3. Chapter 2: Choices and Trade-Offs in the Market...7 Chapter 1: Economics Foundations and Models...3 Chapter 2: Choices and Trade-Offs in the Market...7 Chapter 3: Where prices come from The interaction of Demand and Supply...10 Chapter 4: Elasticity The

More information

Chapter 13 Perfect Competition

Chapter 13 Perfect Competition Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small

More information

Additional Exercises. The Ricardian Model

Additional Exercises. The Ricardian Model Additional Exercises The Ricardian Model 1 Suppose Country A and Country B can both produce bicycles and computers Assume also that Country A s opportunity cost of a computer is three bicycles, and Country

More information

Online Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question.

Online Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question. AP Micro Chapter 8 Test Multiple Choice Identify the choice that best completes the statement or answers the question. 1. There would be some control over price within rather narrow limits in which market

More information

The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues

The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues Working Paper Series, Paper No. 08-23 The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues Helmut Dietl, Markus Lang, and Stephan Werner August 2008 Abstract

More information

Monopoly. Examples: Microsoft and Windows, DeBeers and diamonds, your local natural gas company.

Monopoly. Examples: Microsoft and Windows, DeBeers and diamonds, your local natural gas company. Monopoly A monopoly is a firm who is the sole seller of its product, and where there are no close substitutes. An unregulated monopoly has market power and can influence prices. Examples: Microsoft and

More information

Perfect Competition. Chapter 7 Section Main Menu

Perfect Competition. Chapter 7 Section Main Menu Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?

More information

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. Competition and Democracy Author(s): Gary S. Becker Source: Journal of Law and Economics, Vol. 1 (Oct., 1958), pp. 105-109 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/724885

More information

SOLUTIONS TO END-OF-CHAPTER EXERCISES

SOLUTIONS TO END-OF-CHAPTER EXERCISES SOLUTIONS TO END-OF-CHAPTER EXERCISES Chapter 1 and Chapter 1 Appendix Answers to Thinking Critically Questions 1. Several factors prevent all high-paying service jobs from moving to countries like China

More information

Chapter 4. under Per. erfect Competition 4.1 PERFECT COMPETITION: DEFINING FEATURES

Chapter 4. under Per. erfect Competition 4.1 PERFECT COMPETITION: DEFINING FEATURES Chapter 4 The Theory y of the Firm under Per erfect Competition In the previous chapter, we studied concepts related to a firm s production function and cost curves The focus of this chapter is different

More information

Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change

Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change 1 Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change Introduction This supplemental highlights how markets work and their impact on the allocation of resources. This feature will investigate

More information

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a

More information

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand.

OVERVIEW. 7. In perfectly competitive markets, wages are determined by supply and demand. 15 DEMAND FOR INPUTS OVERVIEW 1. Each firm is involved in two markets, a market for its output and a market for inputs. Decisions the firm makes in one market affect its decisions in the other market.

More information

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction We have already established that taxes are one of the reasons that supply decreases. Subsidies, which could be called

More information

Ec1 ECONOMICS PAPER 1. INSTRUCTIONS TO CANDIDATES: (To be read out by the external invigilator before the start of the examination)

Ec1 ECONOMICS PAPER 1. INSTRUCTIONS TO CANDIDATES: (To be read out by the external invigilator before the start of the examination) INSTRUCTIONS TO CANDIDATES: (To be read out by the external invigilator before the start of the examination) DEPARTMENT OF EDUCATION HIGHER SCHOOL CERTIFICATE EXAMINATIONS ECONOMICS PAPER 1 Monday 23 October

More information