Lessons In Economics From The IPL Auction

Teams spent big money at the December auction. Information, potential and recency effect played their part

British economist Lionel Robbins defined economics as the study of the use of scarce resources which have alternative uses. And what does scarce mean? American economist Thomas Sowell writes in Basic Economics that scarce means "what everybody wants adds up to more than there is".

In simple English, there isn't enough going around for everybody. Now, take the case of the men's Indian Premier League (IPL), the world's most famous Twenty-20 (T20) cricket league, usually played from late March to late May every year. There are 10 teams that play the tournament. They have a certain amount of money which they can use to buy players in auctions and these players then play for the team.

The amount of money that teams can use to buy players is limited. The same is true about the number of players who are skilled enough to be picked up by teams.

So, there is a scarcity of money and there is a scarcity of players. In this scenario, the teams need to allocate money carefully to buy players they think can help them win the tournament.

Typically, every firm makes similar decisions at different points of time. Companies decide whether to enter or not enter a particular business.

They decide to allocate a certain amount of money to enter a certain business.

Then they decide to spend that money in different ways towards different aspects of the business, in order to first get it going and then to keep it running. They also need to decide who to recruit-top management, middle management and foot soldiers-who can then run the business, hopefully successfully. Over a period of time, who to fire and who to retain, also becomes an important decision. Each of these decisions stems from scarcity of resources and is an allocation decision because money and people with adequate skills are usually both scarce.