ECONOMICS

1
ECONOMICS

• the study or explanation of the behavior of
  people relative to costs and benefits the study
  of how people deal with scarcity

2
Fundamental Concepts

• Economic impact how an expenditure, such as
  building a sports facility, will affect a
  geographical region
• Markets the interaction between buyers (their
  demand) and sellers (amount they will supply)
• Market equilibrium the price at which the
  quantity demanded equals the quantity supplied

3
Understanding Markets

• Demand curve relationship between the price of
  a product and the amount of product consumers are
  willing to buy quantity of goods or products to
  purchase at different prices
• Supply curve relationship between the price of
  a product and the amount of product suppliers are
  willing to sell how much suppliers will trade or
  sell at various prices

4
Demand Curve
Price

As prices go up, the number of tickets purchased
goes down. When prices are lower, fans will
purchase or want to purchase more tickets.
50
40
30
20
10
D0
Quantity
1 2 3 4 5
D1
5
Supply Curve
Depicts how much product (such as sports
equipment) suppliers are willing to sell at
different prices (at higher prices, sellers are
willing to supply or sell more)
Price
55
40
25
10
5
10
15
20
Quantity
6
Supply Curve quantity will provide
SALES Price Quantity 1 12 2
28 3 42 4 52
5 60
A supply curve shows how price
influences sellers
7
Supply Curve quantity will provide

• Madden NFL 07 (PS2) from EA Sports
• Increase in demand so can charge a higher price
• Demand curve moves to right
• Supply curve moves upward
• KU wins national championship in basketball
• Increase in demand for KU merchandise and
  clothing can charge a higher price
• Demand curve moves to right
• Supply curve moves upward

8
The theory of supply and demand describes how
prices vary as a result of a balance between
product availability at each price (supply) and
the desires of those with purchasing power at
each price (demand). The graph depicts an
increase in demand from D1 to D2 along with the
consequent increase in price and quantity
required to reach a new market-clearing
equilibrium point on the supply curve (S).
9
Supply Curve quantity will provide

• Basketball arena seating 20,000 people
• Has historically not sold out
• Price points for tickets are for three levels of
  seats (closest to/farthest from the court) two
  sections on each side of the court one section
  at each end of the court.
• Develop a spreadsheet to show the prices at which
  the Athletics Department will supply tickets in
  each section to sell out tickets for each game
  and maximize profit

10
Opportunity Cost An On-Going Cost-Benefit
Analysis

• Value of the next best alternative foregone or
  the value of actions not taken
• If you choose to attend a sporting event as a
  spectator, you will not benefit from engaging in
  an aerobic exercise program at the same time.
• If you choose to purchase a music DVD, you will
  not benefit from having an exercise DVD because
  you do not have money to purchase both.

11
Utility and Marginal Utility

• Utility amount of satisfaction or benefit
• Marginal utility additional satisfaction or
  benefit from each (next) unit purchased thus
  decisions are made based on marginal costs versus
  marginal benefits
• Law of diminishing marginal utility as you get
  more and more of a product, the marginal utility
  of each extra unit gets progressively lower that
  is, each incremental unit adds less to total
  utility

12
Total utility is the sum of all marginal
utilities (i.e., 30 minutes of exercise provides
4 units of utility or benefit, while 60 minutes
of exercise provides 8 units of utility or
benefit, etc.)
Total Utility
14 12 10 8
6 4 2 0
30 40 50 60
70 80 90 Minutes of
Exercise
13
Marginal Utility
8 7
6
5


4

3

2

1


Marginal utility goes down each time.
First 30 min. 8 units Next 10 min. 2 units
Next 10 min. 1½ units Next 10 min. 1 unit
Next 10 min. ¾ unit Next 10 min. ½
unit Next 10 min. ¼ unit
30 40 50 60
70 80 90
Minutes of Exercise
14
Total Utility and Marginal Utility

• Total utility from an activity, such as
  exercising, attending a sporting event, viewing a
  DVD, or playing golf, increases, but at a slower
  rate, because
• The marginal utility is less from each subsequent
  time of engaging in these activities although,
  some benefit is enjoyed with each.
• Example Excitement of attending your first KU
  basketball game, versus the second, third, etc.
• To increase marginal utility, sport managers must
  add to the enjoyment of fans (such as through
  video screens pre-game and half-time
  entertainment give-a-ways)

15
Elasticity of Demand (Ed)

• Percentage change in quantity demanded divided by
  the percentage change in price
• Elastic demand (Ed gt 1)
• A given percentage change in price leads to a
  larger percentage change in quantity demanded
  (for example, a 10 increase in the price of a
  ticket causes a greater than 10 decrease in
  quantity purchased, resulting in a loss in
  revenue)

16

• Inelastic demand (Ed lt 1)
• A given percentage change in price leads to a
  smaller percentage change in quantity demanded
  (for example, a 10 increase in the price of a
  ticket causes a less than 10 decrease in
  quantity purchased, resulting in an increase in
  revenue)
• Unitary elastic demand (Ed 1)
• A given percentage change in price results in an
  equal percentage change in quantity demanded (for
  example, a 10 increase in the price of a ticket
  causes a 10 decrease in quantity purchased,
  resulting in no change in revenue)

17
Elasticity of Demand

• Elastic demand If the Kansas City Royals were
  to increase their season ticket prices by 10,
  the ticket demand would likely fall more than 10
  resulting in a loss of revenue.
• Inelastic demand If a NFL team that sells out
  its stadium for every game increased its season
  ticket prices by 10 annually, the demand for
  tickets would likely drop less than 10 resulting
  in an increase in revenue.

18
Elasticity of Demand

• Elastic demand If ABC Fitness Club, which has
  poor facilities and marginal programs, increases
  its annual membership fee, the number of renewals
  will decrease at a higher rate than the increase
  in revenue from the higher annual membership fee.
  
• Inelastic demand If ABC Fitness Club, which has
  excellent facilities and programs, increases its
  annual membership fee, the number of renewals
  will decrease but this loss will be more than
  offset by the increased revenues from the higher
  membership fee.

19
Other Economic Factors

• Income effect a change in price impacts the
  ability to purchase
• Income elasticity of demand (Ei) the percentage
  change in quantity demanded divided by a
  percentage change in income
• Normal goods have positive income elasticity of
  demand (i.e., as income increases more product is
  demanded at each price level)
• Inferior goods have negative income elasticity of
  demand (i.e., as income increases less is
  demanded because other purchases are made)

20
Other Economic Factors

• Market Surplus excess supply or more than is
  demanded
• Market Shortage less than is demanded or an
  insufficient supply
• Substitutes products filling similar roles
• Complements purchase of one product is tied to
  the purchase of another product
• Monopoly only one firm or seller controls the
  market and sets the price
• Monopsony only one buyer in a market

21
Monopsony Analogous to a Monopoly, but on the
Demand Side

• Only one customer (buyer) in the market (i.e.,
  the demand comes from one source)
• Opposite of a perfectly competitive market
• Controls (pushes down) the market price by
  controlling the quantity the reserve clause
  reduced the availability of players, thus
  reducing their salaries
• A large buyer (such as Riddell football helmets)
  controls a large proportion of the market and
  drives the prices down for the unique materials
  used in making these helmets (i.e., like a
  buyer's monopoly)