On this blog I employ many methods and statistics that I don't really make much of an effort to explain. To make my writing a bit more accessible, I'm going to go out of my way to do just that - explain some of the methods I'm using in a series that I'm going to call Back to Basics, which bears no relationship to the Christina Aguilera album of the same name.
When analyzing free agent transactions, I will often remark that Player X will be worth Amount Y to Team Z. The basis for determining the value of a player comes from his contribution to team wins. It has been found, not surprisingly, that team wins are positively correlated with team revenue. Therefore, the marginal revenue that a player provides (by way of marginal wins) constitutes his value to a team.
If signing Player X will bring Team Z $10.5 million in marginal revenue, then Team Z will be willing to sign that player for any amount at or below $10.5 million, which is the point at which Team Z would break even.
Based on this concept of players' marginal revenue product, an equilibrium price for wins will emerge in any given free agent market. In last year's market, one win typically cost $4.5 million. In the 2009-10 market, wins have gone for about $3.5 million. In reality, the value of a win varies from team to team but these numbers serve as a decent starting point for analyzing transactions.
The quantity of wins that a player can be expected to provide is projected with a metric called Wins Above Replacement (WAR). WAR has been explained over at Beyond the Boxscore in greater depth and clarity than I could possibly hope to achieve. My only real beef with WAR is that it doesn't seem to account for baserunning at this point in time. I'll limit my comments on WAR to what I've already said, as WAR is meaty enough to headline its very own Back to Basics post.
The best analysis that I've seen of marginal revenue product applied to baseball is in J.C. Bradbury's The Baseball Economist. You should also check out his blog, Sabernomics.