Baseball Economics 201

EDUCATOR'S VERSION

This lesson printed from:
http://www.econedlink.org/e908

Posted May 27, 2011

Standards: 2, 13

Grades: 6-8, 9-12

Author: Phillip VanFossen, Dave Koenig

Posted: May 27, 2011

Updated: January 2, 2013

DESCRIPTION

As many baseball fans can tell you, the New York Yankees usually have a great season record, make the playoffs and make a run towards to the World Championship each year. The Yankees' success--as well as the success of other big market, high revenue teams--has led many to question whether smaller market teams can compete in Major League Baseball (MLB). In fact, in 2015, the Yankees had revenues of $508 million, the most of any team in sports--and more than the revenue of four other MLB teams (Florida, San Diego, Pittsburgh, and Washington) combined! Many baseball writers (who may or may not know very much about economics) have written that our national pastime may be threatened by the big market, high revenue teams like the Yankees (or the New York Mets, Chicago Cubs, Boston Red Sox, etc.) and that smaller market teams (e.g., the Miami Marlins, San Diego Padres or the Pittsburgh Pirates) cannot compete for the high salaried free agents (e.g., Alex Rodriguez, David Price) necessary to win championships. In fact, some writers claim that many MLB teams are actually not profitable for the team owners. Are these claims true? Are MLB teams losing money? Are MLB owners looking to dump unprofitable teams on unsuspecting investors? Are MLB players grossly overpaid? This lesson will help your students answer these and other questions.

KEY CONCEPTS

Factors of Production, Incentive, Marginal Resource Product, Profit Maximization

STUDENTS WILL

  • Find the average salary of a Major League Baseball (MLB) player.
  • Identify MLB revenue sources in addition to ticket sales.
  • Use economic reasoning to discuss the argument that MLB players are overpaid.
  • Describe how MLB team owners are acting in their own self-interest by not selling teams that appear to be losing money.

INTRODUCTION

stadiumAs many baseball fans can tell you, the New York Yankees usually have a great season record, make the playoffs and make a run towards to the World Championship each year. The Yankees' success--as well as the success of other big market, high revenue teams--has led many to question whether smaller market teams can compete in Major League Baseball (MLB). In fact, in 2015, the Yankees had revenues of $508 million, the most of any team in sports--and more than the revenue of four other MLB teams (Florida, San Diego, Pittsburgh, and Washington) combined!

Many baseball writers (who may or may not know very much about economics) have written that our national pastime may be threatened by the big market, high revenue teams like the Yankees (or the New York Mets, Chicago Cubs, Boston Red Sox, etc.) and that smaller market teams (e.g., the Miami Marlins, San Diego Padres or the Pittsburgh Pirates) cannot compete for the high salaried free agents (e.g., Alex Rodriguez, David Price) necessary to win championships. In fact, some writers claim that many MLB teams are actually not profitable for the team owners. Are these claims true? Are MLB teams losing money? Are MLB owners looking to dump unprofitable teams on unsuspecting investors? Are MLB players grossly overpaid? This lesson will help your students answer these and other questions.

(NOTE: this lesson updates a 1997 NetNewsLine activity titled "Underpaid Millionaires?" (www.econedlink.org/lessons/index.php?lid=146&type=educator) which focused exclusively on players' salaries.)

Pre-Test

Before beginning the lesson, have the students take the short pre-test to see what they already know about the economics of baseball. Have them print out their answers and save them to compare with their answers on the Post-test.

RESOURCES


PROCESS

Activity 1

MLB Salaries and Wins and Losses

In 1991, the average MLB player's salary was $1 million. What is the average today? Do paying high salaries always translate into championships (or even winning seasons)? This activity will shed some light on these questions.

First, your students will need to print off this Worksheet (Excel Version). You will need to download the Teacher Key (Excel Version). Next, have them use the 2016 payrolls   information for all 30 MLB teams to fill in the worksheet. Be certain that they use the "average team salary" in the worksheet. Next, have the students fill in the 2015 win-loss records for the 16 teams in the National League and the 14 teams in the American League. Finally, have them enter the salary data and the team win-loss records into your worksheet. Are the teams with the largest payrolls the most successful? Do larger market teams (with the high revenues needed to pay high salaries) have an advantage over smaller market teams? Direct the students back to the Worksheet Excel Document (if available) they created with team salaries and wins and losses. They are going to rank teams in each league by the number of wins in 2015 and then compare their average salaries. Ask the students to follow these instructions carefully:

  • First, use your mouse to highlight the "Wins (2015)" column for just the American League (AL).
  • Next, use the "Data" command menu (at the top of the Excel window) to select "Sort."
  • You will be prompted to "expand the selection." Answer "yes" and choose "descending order" from the menu. (NOTE: If you have done this correctly, the Toronto Blue Jays--with 93 wins--should now be the first team on the AL list.)
  • Repeat this process for the National League (NL). (NOTE: If you have done this correctly, the St. Louis Cardinals--with 100 wins--should now be the first team on the NL list.)
  • Here is how the spreadsheet should appear. The average salary for both leagues is $3.88 million.
  • You may want to print out your Excel worksheet and refer to the printout as you answer the following questions:
  1. None of the top seven teams in the American League had an average player salary lower than the MLB average. 
  2. Only three of the bottom seven teams in the American League had an average player salary higher than the MLB average. Which teams were these? [Boston Red Sox ($6,072,047); Seattle Mariners ($4,719,494); and Detroit Tigers ($6,891,290)]
  3. Only three of the top eight teams in the National League had an average player salary lower than the MLB average. Which teams were these? [Pittsburgh Pirates ($2,862,861); New York Mets ($3,558,088); and Houston Astros ($2,466,579)]
  4. Only three of the bottom eight teams in the National League had an average player salary higher than the MLB average. Which teams were these? [San Diego Padres ($4,357,573); Cincinnati Reds ($4,323,418);  and Philadelphia Phillies ($4,434,933)]
  5. What do these results seem to imply? [Those MLB teams with higher average salaries tend to win more games than teams with lower average salaries. This is not always the case, however.

Activity 2

Valuations

gameThe number of games (or World Series Championships) a team wins is just one measure of success for MLB team owners. Most MLB team owners, like other business owners, are concerned about a great many things including bottom-line profitability. While it is important to win games (as this puts fans in the seats at stadiums), teams receive revenue from a number of sources in addition to ticket sales. Use Forbes sports team valuations page http://www.forbes.com/mlb-valuations/list/#tab:overall  to identify some other forms of revenue an MLB team has. [Home attendance, venue (stadium) revenue, media (TV, radio, cable) revenue.

Have the students use the table in the Forbes article to answer the following questions. 

  1. How many MLB teams lost money (had a negative "Operating Income") in 2016? [Two had negative operating incomes; Los Angeles Dodgers (-$73,200,000) and the Texas Rangers (-$4,700,000)]
  2. Year-to-year operating income is only one way to measure an owner's return on his or her investment. Look at the first and second columns of the Forbes chart. The first column indicates how much the franchise is currently worth. The second column indicates the percentage change (from 2015 to 2016) of the value of that franchise. How many teams increased in value from 2015 to 2016? [23 out of 30 teams reporting.]
  3. Take the case of the New York Mets . What was the Operating Income for the Mets in 2013? [-$2.4 million]
  4. What is the estimated current value of the team (if sold now) for owners of the Mets? [$1.65 billion]
  5. Did the team's value increase from 2015 to 2016? [Yes, by 22 percent]
  6. What was the team worth in 2015? [Divide $1.65 billion by 1.22 (represents the 22 percent increase in 2016) and get approximately $1.35 billion]
  7. The dollar value of the Mets increased by how much from 2015  to 2016? [$1.65 billion - $1.35 billion = $300 million]
  8. The dollar value of the Mets increased by how much from 2013 to 2016? [$1.65 billion - $811 million=$839 million] 

What does this analysis imply? Are owners crazy to keep holding onto teams that are losing money? [Even though some teams might be losing money from year-to-year, owners continue to realize returns to their investments in the form of increased team values. Thus owners aren't crazy to keep a team that loses at the gate. In the case of the Mets, the team's value doubled from 2013 to 2016. Not a bad return!]

Activity 3

Player Salaries

What about those outrageous player salaries in the Major Leagues? Ten million dollars per year, and more —to play a kids' game. That's insane! Perhaps the owners are crazy after all! (NOTE: this activity will shed a little light on this complex economic problem, but if you are interested in reading more about this issue, please see the NetnewsLine activity "Underpaid Millionaires?" (www.econedlink.org/lessons/index.php?lid=146&type=educator)).

The owners of businesses (in this case, the owners of baseball teams) buy factors of production (www.investorwords.com/5566/factors_of_production.html ) from individuals who own these factors. For example, the owner of Tastee Tacos buys the factor "labor" (www.econedlink.org/economic-resources/glossary.php?alpha=l) from the high school students who assemble the tacos for him/her. The owner also buys the factor "capital" (www.econedlink.org/economic-resources/glossary.php?alpha=c) when he/she buys the grill used to cook the chicken for the fajitas. Therefore, it is with MLB owners; they buy various factors that go into the product (a MLB baseball game) they sell. MLB players possess a very specialized form of labor (hand-eye coordination, ability to hit a ball 500 feet) that they sell to the owners of their teams.

moneyAre these players overpaid for their labor? An economist would say that owners should pay employees close to the value of the employees' contributions to the company. Economists call contribution the "Marginal Revenue Product" of an employee. This describes an employee's contributions to the final good or service (in this case, an MLB baseball game). What is a player's contribution to the 'bottom line' of an MLB franchise? One way to measure this "marginal product" is to examine the increased revenue a player brings to his team. This might be through more team wins or through more excitement generated by having a great player on your team.

Let's consider the case of Albert Pujols (mlb.mlb.com/team/player.jsp?player_id=405395 ) of the Los Angeles Angels of Anaheim. Many people know that Albert has had a great career in MLB baseball with the all of the stats he has, all-star teams he has been named to and Most Valuable Player awards that he has won. Back in 2001, Pujols earned a salary of $200,000 with St. Louis Cardinals. He played with the Cardinals until 2011.  Did he earn his salary from the Cardinals? Let's see.

  1. In 2001, Pujols was in only his second season for the Cardinals. What were the St. Louis Cardinals total team revenues for 2001? [$110 million]
  2. What was the Cardinals' franchise value in 2002? [$123 million]
  3. Pujol's second full season with St. Louis was in 2002. The St. Louis Cardinals' total team revenues for 2001 were $243 million. What was the Cardinals' franchise value in 2002? [$271 million]
  4. How much did Cardinal revenues increase in 2001 over those of 2002? [$123 - $110 = $13 million]
  5. How much more was the franchise worth in 2002 versus 2001? [$271 - $243 = $28 million]

ASSESSMENT ACTIVITY

What have your students learned? Have them retake the pre-test as a post-test. After they are finished, ask them to compare the pre-test answers with the interactive post-test.

CONCLUSION

Did Albert Pujols earn his salary when he played for the Cardinals? Certainly he was not the only reason the Cardinals improved their revenues and increased their franchise value from 2001 to 2002, but Pujols accounted for some of this growth. Did he earn his "marginal revenue product?" In fact, Albert probably was paid much less than he has meant to the St. Louis franchise and its owners, making much less than his marginal revenue product. More than $600,000 is not enough! It would be hard to convince some people of this, but that is why a little economics is so helpful here. In fact, by 2004 the Cardinals began to realize the value of Pujols as his salary increased from $900,000 in 2003 to $7,000,000 in 2004, a 777 percent increase in one year! Today (2016), Albert makes over $24 million a year as first baseman for the Los Angeles Angels of Anaheim.

A question for the students to ponder is, if a baseball team has nine players who make $1 million each, would they be better than a team that has one superplayer who makes $8.2 million and eight players who make only $100,000?

EXTENSION ACTIVITY

Have your students use this Correlation Co-efficient Calculator to figure out the correlation co-efficient for the entire league in 2009. Ask them to enter each teams win total for the "X Value" and then each team's average salary for the "Y Value". Explain that they should show average player salaries by a rounded two-digit number to represent total in millions (example, $1,314,786 would be 1.3). Then have them go this CBS Sports MLB Salaries page to see the average player salaries and percentage change for each year since 1989.

Ask the students: What does the correlation co-efficient, average player salaries and change from year to year say about Major League Baseball? Do you think this is the same for other professional sports? How would adding or removing teams from MLB affect these numbers? After seeing all of the economic statistics of Major League Baseball from this lesson, do you think players are underpaid, overpaid or being paid the right amount? Why?