Category: Economics: Ch 09

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Striking it rich?

The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?

Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.

City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise

Questions

  1. Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
  2. If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
  3. What difficulties are there in developing Manchester City into a ‘global brand’?
  4. In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?
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Free for all?

Google is a classic example of the new ‘Internet economics’. The main service it provides – search – is completely free and yet it is an enornmously profitable company and growing fast. Much of what they provide in addition to their search service is also free: Google Docs, Google Maps and Google Scholar. So how do they do it? The first link below is an article considering this issue and the second link gives access to an archived version of In Business giving further detail. The programme is well worth listening to. A key part of the explanation for this new phenomenon relates to the low and falling costs of providing these internet services.

Buy none, get one free BBC News Online (8/1/09)
Free for all BBC News Online (8/1/09) In Business – programme archive

Questions

  1. Write a short paragraph explaining briefly the Google business model.
  2. Identify two fixed and two variable costs of running an internet search service.
  3. What are the marginal costs of Google providing additional internet searches?
  4. Discuss the relationship between costs, revenue and profit for a company like Google as demand for their servces grows.
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An asymmetrical crisis?

The economist Joseph Stiglitz won the Nobel Prize for Economics in 2001. Along with George Akerlof and Michael Spence, he worked out a theory of information asymmetry: a situation where both parties in a transaction have different levels of information. Could this theory have some relevance as an explanation of the current financial crisis?

In praise of …..Joseph Stiglitz Guardian (8/10/08)
Stiglitz lecture on financial crisis available online University of Manchester (13/10/08)

Questions

1. Explain what is meant by information asymmetry.
2. Explain how information asymmetry can lead to markets working imperfectly.
3. Discuss the extent to which the theory of information asymmetry may be relevant as a partial determinant of the current financial crisis.
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The morally hazardous business cycle

“‘Capitalism,’ Schumpeter wrote, ‘is by nature a form or method of economic change and not only never is but never can be stationary … This process of Creative Destruction is the essential fact about capitalism”. In the article below William Keegan looks at this process of creative destruction and relates it to the current financial crisis and the downturn in the business cycle.

Moral hazard? It’s just another danger along the capitalist way Guardian (5/10/08)
Time To Drop The Baggage That Comes With Moral Hazard Financial Times (4/10/08)

Questions

1. Explain what is meant by the term ‘Creative Destruction’.
2. Explain what is meant by the term ‘Moral Hazard’.
3. “In theory, enlightened economic policies can moderate the workings of the business cycle”. Discuss possible policies that can moderate the workings of the business cycle.
4. Discuss the extent to which the recent economic boom was an ‘asset-price boom’ rather than a ‘traditional one’.