When economists explain how firms make their choices when they are maximizing profits, it’s generally assumed that costs of production increase faster than revenue. When a profit-maximizing firm “chooses” its output level, it chooses to produce up to that point where the additional revenue from selling is as close as possible to the additional costs incurred. Beyond that level, costs at the margin exceed revenue and the firm’s profits fall.
Fixed costs don’t matter in the production decision because they are not under the control of the firm, but since variable costs are under the control of the firm, it must be able to cover its variable costs of production when it chooses to produce. If it can’t then the business shuts down until better conditions warrant otherwise.
How often does this happen in sports? It doesn’t happen often in the 4 major sports in the US, but it does happen. Consider the case of the New Orleans VooDoo of the Arena Football League as quoted from owner Tom Benson:
“The decision has been made to suspend play of the New Orleans VooDoo in New Orleans for the 2006 season. Factors beyond our control are forcing us to make this decision. We will not have a facility available to us to play our games, we will not be able to house players and staff and we will not be able to utilize our practice facility as it is being used by the government for Hurricane Katrina operations.”
