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Chapter Two

Chapter Two. Review of an Economist’s Arsenal. Topics We Shall Review. Supply and Demand The irrelevance of fixed costs How monopolies set prices Do the Chicago White Sox charge too much? Do the Chicago Black Hawks charge too little?. The Law of Demand. Demand curves slope Down

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Chapter Two

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  1. Chapter Two Review of an Economist’s Arsenal

  2. Topics We Shall Review • Supply and Demand • The irrelevance of fixed costs • How monopolies set prices • Do the Chicago White Sox charge too much? • Do the Chicago Black Hawks charge too little?

  3. The Law of Demand • Demand curves slope • Down • Income effect • Can afford more • Substitution Effect • Replace more expensive • Good with less expensive one P D Q

  4. Maximizing Profit • Recall: Profit = TR-TC • Profits are maximized when: MR=MC • Key question: What do the NY Jets sell? • Tickets! • Larry Johnson’s salary is a fixed cost to the Jets • It is unchanged no matter how many tickets they sell • Signing Johnson does not affect MC

  5. Why Do Teams Raise Prices? • MC does not change – but MR might • More fans want to see the Jets play • Demand – and MR – shift right • The Jets charge more because they can – not because they must

  6. Phillies’ Pricing Strategy • A monopoly • Demand slopes down • What is MR? • Why does it look like this? • MC a backward “L” • Capacity = vertical segment • It doesn’t pay to sell out $ MCP Pe Qe D MR

  7. How About the Flyers? • Wachovia Center holds ~19,500 • Citizen’s Bank Park holds ~43,000 • Flyers should • Sell out • Charge higher prices P MC MCF Pe D Qe MR

  8. Uncertainty • Are the Yankees bad for baseball? • Are dynasties a bad idea? • How often should the home team win? • Why do teams sell season tickets? • Why do fans buy them?

  9. Can Losing be Good? • Cleveland Browns dominated the old AAFC • Fans lost interest • Even Browns attendance fell • Attendance fell in MLB in 1950s • Dodgers, Giants, or Yankees were in every World Series • Why bother seeing Pittsburgh play Cincinnati? • A study has looked at attendance in MLB • Controlled for day, time, weather, quality of opponent • Attendance highest when home team won 60% of time

  10. Season Tickets • Pay for a December game in March • Transfers risk from team to fans • Why would fans assume risk? • Often pay lower price • Get preferred status for post-season

  11. Comparative Advantage and Baseball Lineups • Assume two positions • Pitcher • Everyday player • Player A • Good pitcher • Contributes many wins • Bad hitter • Contributes few wins Wins with A pitching Wins with A hitting

  12. Comparative Advantage and Baseball Lineups • Player B • Bad pitcher • Contributes few wins • Good hitter • Contributes many wins Wins with B pitching Wins with B hitting

  13. Intuition Easy • Have good pitcher pitch • Lose little in hitting – gain a lot in pitching • Have good hitter play every day • Lose little in pitching – gain a lot in hitting • Each player exercises absolute advantage • How can we prove this policy is best?

  14. Add Constraints in a Special Way • Add constraints • Add vertical intercepts • Add horizontal intercepts • How to get from one intercept to the other? Pitch A B Field

  15. Filling in the Middle • At vertical intercept both specialize in pitching • Let B begin to play every day • Move out from y-axis • Constraint is flat • At endpoint B never pitches Pitch A+B A B Field

  16. Completing the Constraint • Next let A begin to change • Gradually reduce pitching • Constraint segment is steep • At end neither A nor B pitches • Back to x-axis • Constraint has kink • At kink each player specializes • A pitches • B plays everyday Pitch A+B A B Field

  17. Best Results from Specialization • A & B produce the most wins at the kink • Exercise: • What does constraint look like if they specialize in opposite ways? • What happens to wins? • Often use this model in different contexts • International Trade • Traditional Sex Roles in Household

  18. Application to Sports • Compare Lou the Toe Groza to Olindo Mare

  19. Another Application • Why is figure skating called figure skating? • Used to have to trace figures in ice • Intricate • Looks boring on TV • Peggy Fleming’s Olympic performance in 1968 wouldn’t win as a novice today

  20. Enter the Bambino • Babe Ruth was best pitcher on Red Sox • Was best hitter in all of baseball • How to illustrate him vs player A or B? • Ruth has absolute advantage over both • Does A or B play at all? • Key is Comparative Advantage • Specialize where relative advantage greatest • Do not do everything – even if best at it

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