Table of Contents
This research paper seeks to find out and understand the elasticity of the English premier league. In particular it will examine two types of elasticity namely the income and the price elasticity of the ticket prices. From the economics point of view there is a relationship between the price of a commodity and the quantity demanded of that commodity in the market. Also the income level of the consumers has some bearing on the amount of commodity that the consumers demand. This paper therefore seeks to find out how the prices of the tickets affects the number of fan willing to watch the various football matches in the league. It also intends to find out the effects of the people income on the affordability of the tickets at their prevailing prices. Mathematical analysis of these two economic phenomena shall be carried out as well.
English premier league is the most popular league in the world. It is estimated that over five hundred million people in the world watch this league. There are twenty participating teams in the league each and every season. The league is structured as a company with each of the teams having a stake in its operations and management. The media has contributed a lot in its success because of much coverage given to it. Having this in mind, it is therefore very apparent that even in Britain there is a very huge fan base meaning that the ticket prices charged by various teams is a very critical issue almost of national and international importance. Each team plays a total of thirty eight games in a season. A Variety of factors determines the number of fan attending a particular game. These are factors like the performance or quality of the team, the importance of a specific game since many people are likely to attend a final in a league as opposed to ordinary games, the sensitive games such as those very critical in certain times in the league. All these factors are vital but the prices of tickets and the income of the fans are dominant factors. This makes their evaluation exceptionally critical especially when doing it from an economic angle. Sports teams generate revenues from three general sources: ticket sales, concession sales, and the sale of media rights. To generate maximum revenues, it is absolutely important that teams possess knowledge about the link between ticket prices and attendance of the sporting activity, (Nakrani, 2008).
The table below shows the attendance and average prices of tickets charged by the following English Premier League clubs in the current season 2012/2013.
|team||attendance||Ticket price charged per season|
The three bigger teams above have a bigger fan base so any increase in ticket will not have any big effect on the quantity of their tickets demanded but for the last two they have fewer supporters thus increasing their prices shall produce a bigger effect on the quantity of tickets bought.
This research is based on the survey of the prices and average income of the football fans. It will also utilize information on the internet in order to establish some information on clubs ticket prices.
PRICE ELASTICITY OF DEMAND
This research paper starts its analysis on the ticket prices by looking at the price elasticity of demand of the ticket prices. Price elasticity of demand of a commodity measures the responsiveness of the quantity demanded of a commodity occasioned by the change in its price. In this paper therefore it seeks to explain the effects of ticket prices on the number of people purchasing the tickets of a club in the English premier league. In the economic theory of a product, a single product firm will generate maximum returns when it produces an amount where the operational costs of production represented by the marginal costs are equal to the accumulate revenue from the sales of that product i.e. the marginal revenue streams arising from the sale of the commodity. Macro economists however have identified close relationship between the marginal revenue and the elasticity of demand of a product. When a firm sells more of its goods its revenue streams increases, ceteris paribus. However, if the resulting raises in sales result from a lowering of the commodity price, then the price change gives a balancing effect on revenue,(Bailey, 2009).
ELASTIC DEMAND FOR A TICKET
The price elasticity of demand is said to be elastic if the change in price has a bigger effects on the quantity demanded of a commodity. The calculated value of elastic price elasticity of demand is greater than 1.When the demand for a product is elastic; lowering a product’s price causes revenues to increase i.e. Marginal revenue is positive value. When the demand is unit elastic, revenues remains constant and as such they neither increase nor decrease. The marginal revenues of such a product is zero [MR=0]. When demand is inelastic however revenues fall leading to a negative marginal revenue value. Because a firm generates maximum profits by selling where marginal revenues equal marginal costs, a firm facing marginal costs that’s are not negative in their magnitude, such a firm will set its product price in the elastic or unit elastic region of the product demand curve. Suppose that the marginal cost of allowing a fan into a football field is zero i.e. All costs are fixed then pricing at the unit-elastic point results to maximum profits for the club. This explains why teams set ticket prices around the unit-elastic section of the demand curve so that they can derive profitability from the sale of their tickets. However this elasticity may not be very reliable because the ticket costs are only a part of the total costs the club incurs in a match day. However some teams in the English premier league prefer to set their ticket prices in the elastic zone in the demand curve for their tickets.
As shown in the graph above some teams will opt to fix their ticker prices in the elastic zone but as shall be explained below most teams prefer to determine their prices in the inelastic region in the demand curve of their tickets demanded by their fans. As price elasticity increase revenue streams increases up to a certain level then it starts decreasing as depicted in the second graph because higher PED means fans are very responsive to ticket price compared to lower PED because change in price will have insignificant effect on number of tickets purchased, (Frank, 2008).
Suppose that the initial price of a ticket of a club is 500 pounds and the number of fans able and are willing to buy the tickets on a math day is 150000. The club decides to increase its ticket cost owing to increased operational costs to prices of tickets in the part of the demand curve for their tickets where there is inelastic demand. As noted above the inelastic price elasticity of demand a change in price of a commodity will have insignificant effect on the quantity demanded of a commodity .The inelastic pricing do bring a lot of contradiction because it elucidates that clubs have quoted ticket prices that are very low in terms of price if teams seek maximum profits. If teams indeed price at a point where demand is inelastic, increasing ticket prices would lead to more ticket revenues streams. The basis for this is that inelastic pricing promotes more people to attend games because the clubs would choose relatively low ticket prices to attract more fans to attend games in order to improve home ground merits. Another possibility is that teams set low priced tickets in exchange for public subsidies. This research has clearly established that inelastic ticket pricing should be implemented in some events because of the trade-off between entrance revenue realized and other source of money that clubs do get cash from. Majority of clubs in the English premier league in fact almost all of them are not single-product clubs, they deal with a varied product lines in order to boost their revenue reserves and also maximize the shareholders return and expectation. They rarely get cash from tickets only as they provide various services to their fans such as car parking facilities and sale of the drinks and snacks that fans consume while watching the games. It is certainly understandable that club owners would from cost benefit point of view accept lower ticket charges in exchange for earnings from other sources.
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Calculation of inelastic demand
Suppose that the initial price of a ticket of a club is 500 pounds and the number of fans willing to buy the tickets are 50000.in the course of the season the club decides to revise its ticket prices upwards to 600 pounds and the number of fans who are able and willing to buy the tickets are 40000.the price elasticity of demand of the tickets can be calculated as follows
Change in price = new price-initial price=600-500=100
Change in quantity demanded of the tickets=new qty demanded-initial qty demanded=40000-50000=10000
Price elasticity of demand=percentage change in qty demanded/percentage change in price
Ped=] change in qty demanded/initial qty demanded] /[change in price/initial price]
=change in qty demanded/initial qty demanded*initial price/change in price
[10000/50000 * 100/500]*100=0.04.
From the calculations the price elasticity of demand is less than 1.This is the inelastic price elasticity of demand. This elasticity states that change in the prices of a commodity will cause a little or no change to the quantity demanded of a good .In the above case the implication is that following an increase in ticket prices the number of tickets bought by the fans reduces at a rate of 0.04.this is very small and/or insignificant, (Sloman, 2006).
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INCOME ELASTICITY OF DEMAND
Income elasticity of demand measures the responsiveness of the amount demanded of a commodity when income of the consumers changes other factors held constant. Income elasticity measures the change in the quantity demanded of a good with respect to changes in consumer disposable incomes. Estimating income elasticity allows for researchers to conclude on whether consumers are relatively responsive to changes in income and it also permits a researcher to conclude on whether a good is an inferior good or normal good. Whereas most of the attention has been on the elasticity of demand many of the researchers have commented on income elasticity’s. The demand for soccer in the premier league is inferior, suggesting that as average incomes increases the demand for soccer will reduce. The English premier league soccer is a normal good. The demand for a product also depends on the people’s level of their disposable income. This is because upon receiving ones income this income is consumed or saved and/or invested. However, when people’s income rises the consumption expenditure goes up but not in the same proportion as the change in income. The consumption expenditures are more than proportionate change in income. A rational consumer will thus choose to consume the commodity that maximizes his or her utility subject to his or her budget constrain. In Britain the economy has been faced with lot difficulties with inflation persisting over the recent years as well as increased rates of unemployment to majority of Britons. The increasing inflation increases operational costs for these clubs with prayers agitating for increased pay to cushion them from increased costs of living. However these clubs also understands that there are difficulties facing many people across the United Kingdom. The club management however understands that football is worshiped by majority of Britons and is almost a necessity to them. This thus calls for factoring of this information in the ticket prices. The formula stipulated below is used in the determination of income elasticity, (Wall, 2008).
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Income elasticity of demanded=change in quantity demanded of the commodity/change in income of consumers
Change in quantity demanded=new quantity demanded-initial quantity demanded
Change in income=new level of income-initial level of income
If x1 and x2 represents quantity initial and new quantity demanded of the tickets respectively
Let E1 and E2 represent initial and new income levels respectively. Then,
Ep=[x2-x1]/X1 / [E2-E1]/E1
Income elasticity of demand,
Ep=[x2-x1/x1 * E1/[E2-E1]
The income elasticity is also calculated as=percentage change in quantity demanded/percentage change in income
The aggregate average income of Britons per annum rose from tickets 12000 pounds to 15000 pounds. The number of tickets sold by a club increases from 15m to 20m.calculate the income elasticity of demand.
Change in tickets sold=new quantity sold-initial quantity sold
Change in the level of income=new income level-initial income level
Ep= [5000000/15000000] * [12000/300] =0.008.
The decision rules is that when Ep is greater than 1 income and quantity demanded are directly related and the product is normal good. If Ep is between 0 and 1 the income and quantity demanded are directly related the good is a normal good but the income is inelastic. When Ep is negative, income and quantity demanded are inversely related and the good is inferior. In the above example the income elasticity is 0.008 this is clearly between 0 and 1.This is the quantity of ticket bought changes by a proportion of 0.008 owing to the change in the income of the fan who are willing and able to buy these tickets. The implication is that income and numbers of tickets are directly related to each other. The football is thus a normal good in Britain, (Wilson, 2007).
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If the percentage change in quantity demanded is 20% and the percentage change in income is 50%, then the income elasticity of demand is given by
As income raises the demand for income elastic goods increases because consumers have more money to spend but for income inelastic product increase in income will lead to very small changes in quantity demanded. For a normal product the demand of the commodity increases as the income of the consumers increase. The football in Britain is a good case of a normal good in Britain thus it follows the behavior of other normal good. As such as the income of majority Britons increase the more they will be in a position to afford tickets to watch football matches, (Harris, 2010)
In conclusion the majority of clubs in the united kingdom uses the inelastic method of ticketing their prices because they recognizes that under inelastic regime increasing the prices of the tickets will have a very small or insignificant effects on the quantity of tickets demanded. From the research it was also established that various teams in the British premier league charges various level of prices in their tickets depending on their various financial needs. They also take advantage of the fact that most people in Britain are obsessed with soccer and that majority of the population in Britain are better off financially thus there is a very small effects of the quantity demanded of the tickets when they hike the prices of their respective tickets. Thus the general comment that can be made regarding the elasticity of the English Premier League is that it adopts inelastic ticket pricing.