Scarcity, opportunity cost and a football club

Let us start with a basic rule of economics! If something is scarce – it will have a market value. If the supply of a good or service is low, the market price will rise, providing there is sufficient demand from consumers. For example, the low levels of water in New Zealand’s South Island dams forced up the market price of electricity for some consumers.

A football player in the English Premier League (EPL) starting wage is between £12-18m, well above £50k a week, nudging nearer to £100k for first team regular players at top half clubs – £1 = NZ$2.04 approx. Top players e.g. Kevin De Bruyne of Manchester City (below) – earns £21m a year which equates to £404,000 (NZ$824,000) per week.

For top clubs the fear of missing out on talent leads to individual player transactions being vastly overvalued in comparison to the alternative uses of that money. In economic terms you would say there is information asymmetry. The transfer market suffers from the lemon problem – this refers to issues that arise regarding the value of an investment or product due to asymmetric information possessed by the buyer and the seller. Put simply the buyer can’t really judge the current value of players. This probably leads to too high a value being put on recent performance and too low a value being put on players who haven’t played recently or don’t have an established reputation

Example: A club has £20m (plus £80k a week wages for 5 years) available to spend. What else could £20m (plus £80k for 5 years) buy? In 5 years’ time, what are the expected payoffs of either purchase?

Alternatives:

• Clear debts: £~10m

• Cover deficit: £5m a year, including cost of a new management team to put a sensible structure in place, then run at break even.

• Build a new stand and ground infrastructure.

• Put the money into the youth development programme

Therefore the definition of opportunity cost in decision-making is the value of the next-best alternative forgone.

Source: Opportunity Cost in football

For more on Opportunity Cost view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.