Question

Econ 3030- Sports Economics

1) Explain how the law of diminishing returns provides a natural tendency toward competitive balance.

Answer 1

Competitive Balance refers to a team, having all sorts of players, some of which are excellent, while others may not be as excellent but are still at par to play a game. In competitive sports, people are hired for a season by a team, to perform and win if possible.

The Law of Diminishing Returns here, plays an important role in team selection it clearly states, that as we go on increasing our resource, the net benefit from the additional hire, goes on decreasing in value i.e. increasing expenditure does not result in increased benefit.

We from this theory know, that hiring all good players does not result in 100% efficiency for a team. A team cannot gain more, if it has all good players, as its expenditure would go up and the result of hiring an additional player who is an out performer, would be higher than the net benefit.

This is because as a firm increases its expenditure on hiring the best talent, there is no guarantee that the same level of performance would be achieved. As an example, if a team were to hire the best goal keeper and then keep an additional backup, the end result would not mean that the team would win at all times, as the benefit received from having an additional goal keeper would not result in better results for the team.

Therefore, to strike a balance between costs and benefits, the tendency of teams remains to have a balanced team, which has a mix of players this helps in leading towards competitive balance.

It is done so as to ensure, that hiring all best players does not increase expenditure, as when we go on adding good players up and over average ones, the results cannot be guaranteed. In fact, the results become diminished as a sense of insecurity and performance issues crop up over a period of time. Striking a balance thus is important.

Please feel free to ask your doubts in the comments section.