By Robbie Butler
Pick up any standard microeconomics textbook for undergraduates and you will meet a chapter explaining the theory of the firm. Readers will be introduced to issues like profit maximisation, marginal revenue, average costs and marginal costs, amongst other things.
Embedded in the theory is an explanation of "shutting down" and "exiting" the market. The former is regarded as temporary closure, while the latter is permanent. Because of this distinction, the short-run decision (shutdown) and long-run decision (to exit the market) differ for the firm. If a firm shuts down, it loses all revenue from the sale of its product, but must still cover all fixed costs. Therefore, the firm will shut down if the revenue it would get from producing is less than its variable costs of production. The firm will only exit the market if total revenue from the sale of its product is less than the total cost of production (all costs).
Sky Sports have a lovely insight to this today thanks to an interview with Tranmere chairman Mark Palios. Football clubs have essentially "shut down" in recent months - with no fans at games. The variable cost of fans (security, light, heat, insurance, health and safety, policing, etc.) have largely disappeared. However, the reopening of stadia will bring these costs back. The fixed costs never left e.g. player salaries.
Palios explains the problem this is for clubs.
"If you just come down the tiers to 2,000 fans [tier 2], our season tickets are 3,000. So actually cash-wise we are probably worse off because if we have fans in the ground, I know the costs would be about £10,000 to open up. We'd have all the gates open for social distancing, and all the turnstiles on. As a consequence of that, we wouldn't get anymore cash and we'd have to spend £10,000 a match. If it stayed like that, in the context of about a further 18 matches, it's nearly £200,000 of costs. And if you were allowed in 4,000, it's only for the extra 1,000 of general attendance [on top of 3,000 season ticket holders], but we'd still have the costs. It would be pretty minimal, with regards any excess for us."
A lovely illustration of fixed costs, variable costs and total revenue, and the problems facing clubs that rely on match-day income as their primary source of revenue.
Pick up any standard microeconomics textbook for undergraduates and you will meet a chapter explaining the theory of the firm. Readers will be introduced to issues like profit maximisation, marginal revenue, average costs and marginal costs, amongst other things.
Embedded in the theory is an explanation of "shutting down" and "exiting" the market. The former is regarded as temporary closure, while the latter is permanent. Because of this distinction, the short-run decision (shutdown) and long-run decision (to exit the market) differ for the firm. If a firm shuts down, it loses all revenue from the sale of its product, but must still cover all fixed costs. Therefore, the firm will shut down if the revenue it would get from producing is less than its variable costs of production. The firm will only exit the market if total revenue from the sale of its product is less than the total cost of production (all costs).
Sky Sports have a lovely insight to this today thanks to an interview with Tranmere chairman Mark Palios. Football clubs have essentially "shut down" in recent months - with no fans at games. The variable cost of fans (security, light, heat, insurance, health and safety, policing, etc.) have largely disappeared. However, the reopening of stadia will bring these costs back. The fixed costs never left e.g. player salaries.
Palios explains the problem this is for clubs.
"If you just come down the tiers to 2,000 fans [tier 2], our season tickets are 3,000. So actually cash-wise we are probably worse off because if we have fans in the ground, I know the costs would be about £10,000 to open up. We'd have all the gates open for social distancing, and all the turnstiles on. As a consequence of that, we wouldn't get anymore cash and we'd have to spend £10,000 a match. If it stayed like that, in the context of about a further 18 matches, it's nearly £200,000 of costs. And if you were allowed in 4,000, it's only for the extra 1,000 of general attendance [on top of 3,000 season ticket holders], but we'd still have the costs. It would be pretty minimal, with regards any excess for us."
A lovely illustration of fixed costs, variable costs and total revenue, and the problems facing clubs that rely on match-day income as their primary source of revenue.
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