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1 EQUILIBRIUM IN TOURISM MARKETS 1. The establishment of partial equilibrium 2. The problems of identifying equilibrium in tourism 3. Factors causing shifts.

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Presentation on theme: "1 EQUILIBRIUM IN TOURISM MARKETS 1. The establishment of partial equilibrium 2. The problems of identifying equilibrium in tourism 3. Factors causing shifts."— Presentation transcript:

1 1 EQUILIBRIUM IN TOURISM MARKETS 1. The establishment of partial equilibrium 2. The problems of identifying equilibrium in tourism 3. Factors causing shifts in equilibrium 4. Effects of taxation on tourism 5. Equilibrium and price controls 6. The dynamics of equilibrium in tourism markets

2 2 1. Establishment of Partial Equilibrium  For each product in an economy there will be (cet.par.) a unique equilibrium market price and quantity, representing a partial equilibrium in the aggregate economy.  The sum of all partial equilibrium in an economy determines two things: > General equilibrium (of all interdependent markets) > The allocation of resources to those who are willing and able to pay, by methods using the most economic inputs or factors

3 3 1. Establishment of Partial Equilibrium In practice the operation of price mechanisms to achieve a market clearing equilibrium is NOT simple. In practice the operation of price mechanisms to achieve a market clearing equilibrium is NOT simple. There are monopolistic imperfections and restraints on free trade in most markets; governments and other authorities intervene; and producers and consumers rarely sell and buy with the perfect knowledge of marketplaces that theories suggest they should have. There are monopolistic imperfections and restraints on free trade in most markets; governments and other authorities intervene; and producers and consumers rarely sell and buy with the perfect knowledge of marketplaces that theories suggest they should have. Markets are dynamic rather than static, so that constantly changing conditions may never permit the attainment of a stable equilibrium position. Markets are dynamic rather than static, so that constantly changing conditions may never permit the attainment of a stable equilibrium position.

4 4 2. The problems of identifying equilibrium in tourism  Identifying equilibrium in travel and tourism markets poses two particular problems; 1. the geographical nature of the activity, 2. divergent perception of the product by suppliers and tourists  For the first, the tourism market in any one country is a blend of domestic and international demand, and

5 5 2. The problems of identifying equilibrium in tourism  The international component may well be relatively more significant than foreign trade in most goods relative to the economy's domestic markets.  This complicates the supply relative to any major generating area (demand), and the demand relative to any destination area (supply).

6 6 2. The problems of identifying equilibrium in tourism  If there are n national economies in the world, the total number of travel and tourism "markets" will be n (n-1) international ones plus(+) n domestic ones.  As an analogy to the principle of few major variables exercising the most understandable effect, for most economies there will be a relatively small number of significant tourism demand generators or tourism supplying destinations.

7 7 2. The problems of identifying equilibrium in tourism  Assuming worldwide g notable generators and d' destinations the total number of tourist markets is gd' international plus n domestic.  Since demand conditions inevitably vary constantly between the (g) generators, and supply conditions vary between the d' destinations, any simple partial equilibrium in travel and tourism is in practice difficult to arrive at.

8 8 2. The problems of identifying equilibrium in tourism  Divergent perceptions of tourism between suppliers and consumers.  Since most consuming tourists consider a business or a vacation trip as a single (and major) purchase, then it should be possible to identify a single, coherent (appropriate) demand side to establishing an equilibrium position.  suppliers very often tend to view things differently, in the context of individual sectors.

9 9 Perceptions of the travel and tourism marketplace SupplyDemand Carriers (Transportation) Accommodation Establishments Attractions Tourist Bureaus Travel Accommodation Activities Information Travel and Tourism Tourists Tour Operators and Travel Agencies

10 10 2. The problems of identifying equilibrium in tourism  One way to resolve the divergence is to assume that demand for each of the sectoral products - attractions, lodging and so on - is a derived demand emanating from overall tourism industry markets.

11 11 The problems of identifying equilibrium in tourism  The result is that disequilibrium in one sector may easily, via overall tourism markets, cause disequilibrium in others; hotel accommodation shortages in a destination can mean airlines lose demand on routes to that destination, and the reverse is equally true.

12 12 Figure 4.2: Equilibrium in tourism Price D D SPe Quantity QeQc S1S1S1S1 D1D1D1D1 0

13 13 3. Factors causing shifts in equilibrium  assumes a short-run situation in which demand for tourism in a destination market in total DD 1 reflects price "stickiness” caused by differentiated product attributes and imperfectly competitive suppliers.  Figure 4.2 assumes a short-run situation in which demand for tourism in a destination market in total DD 1 reflects price "stickiness” caused by differentiated product attributes and imperfectly competitive suppliers.  Supply SS 1 reached capacity quantity at Q c, and the load factor or occupancy rate is 0Qe/0Qc % at an equilibrium price level of P e.

14 14 3. Factors causing shifts in equilibrium  If there were sufficiently long horizontal sections of both the demand and supply schedules at P e, it is possible that there would be no unique equilibrium quantity Q e, but rather a range of quantities which could be regarded as satisfying equilibrium.

15 15 4. Effects of taxation on tourism  Government frequently impose (reduce or remove) taxation on tourism products, both to raise revenue and to discourage or encourage the consumption of particular types of tourism.  Some examples are: > Airport departure tax > "Bed" tax (hotel room tax) > Permits for entry to destinations areas > Entry or transit visas > Exit visas > Duty free goods (tax reduction or removal)

16 16 4. Effects of taxation on tourism  These types of tax may change the price of the tourism industry product.  The amount of the price change will depend on the type of tax and its incidence (rate).  Any tax on something falls directly on purchasers, with the total price of the tourism product increasing by the full free amount.

17 17 Figure 4.3 Effect of Taxation on equilibrium in tourism market D S 1 /S D S 1 /S Quantity Price 0 QeQtQF S D1D1D1D1 S1S1S1S1 Ps Pe Pt

18 18 4. Effects of taxation on tourism  However, sellers may not be able to pass on the full tax amount to buyers unless demand is totally inelastic.  This is demonstrated in the figure above. To consumers, supply SS 1 shifts upwards to S * S * 1 to reflect the imposition of a tax such as bed tax.  The new equilibrium position depends on the elasticity of demand over the range under consideration.

19 19 4. Effects of taxation on tourism  If demand is relatively inelastic, hoteliers are able to pass on most or all of the tax in higher rates; but with elastic demand, they will be forced to absorb the tax themselves in order to compete.  Researches have found, as shown in the example above that the incidence of such tax tends to be shared between suppliers and tourists.  Here tourists are paying Pt – Pe extra, and suppliers absorb Pe - Ps, now receiving Ps as net price.

20 20 5. Equilibrium and price controls  Not many examples of intervention to control prices in tourism  However, in some occasions governments intervene in specific sectors to establish set prices, price bands or maximum or minimum prices.  Domestic airfares in many countries are still controlled, lodging rates may be price-banded in line with compulsory classification systems, and of course foreign exchange is frequently subject to controlled rates.

21 21 5. Equilibrium and price controls  There is no problem when controlled prices are line with what a free market equilibrium would set; but where this is not true, an excess demand or oversupply can result.  Assume that international tourists visit a country whose the currency is fixed artificially high. Tourists are unwilling to convert as much of their home currency, say dollars, as they would like because of the high rate.

22 22 5. Equilibrium and price controls  This is demonstrated in the figure below, where the would-be free market equilibrium supply and demand for domestic currency (for tourist purposes) is shown at P e.

23 23 Figure 4.4. The Effect of an artificially high controlled tourism exchange rate Price Price D S D S Pc Pc Pe Pe Pb Pb Quantity 0 Q1 Q2

24 24 5. Equilirium and price controls (figure)  If the controlled exchange rate is held at P c currencies to the dollar, there is an “oversupply” of zilches (currency of the country) in the sense that tourists are only prepared to buy Q 1 currencies with their dollars, and Q 2 - Q 1 represents an unfulfilled willingness by suppliers in the destination country to “earn” more tourist dollars.

25 25 5. Equilirium and price controls (figure)  This oversupply in the official foreign exchange market may be countered by a black market trade.  To balance the oversupply of Q 2 - Q 1, a black market rate of P b would be required to create extra demand for Q 2 - Q 1 currencies by tourists.

26 26 6. The Dynamics of Equilibrium in Tourism  Equilibrium in tourism industry is not a static position, but changes over time.  shifts in the short run, and processes of long term tourism development.  Assume a short run situation where tourism industry suppliers have no clear idea of likely coming seasonal demand for their products. They may attempt to raise prices to fill capacity, but find that demand falls very short at those prices.  How can this market approach equilibrium?

27 27 6. The Dynamics of Equilibrium in Tourism  Given the pressure exerted (forced) on producers by cost structures to supply at or near full capacity, tourism industry markets tend to exhibit conditions leading to stability in the short run.  That is, adjustments are made through the price system rather than suppliers attempting to change quantities supplied.

28 28 6. The Dynamics of Equilibrium in Tourism  In this case fares, room rates and so on may be cut, but at the same time seasonal demand increases produce an excess demand.  Suppliers respond, probably after an adjustment lag (slow development), by raising prices again, but once again these may not find equilibrium.

29 29 Figure 4.5 : Dynamic cobweb of lagged adjustment in tourism markets. Price Demand Supply Demand Supply P P P P P 3 1 P 3 1 Output Q1Q2Q30

30 30 6. The Dynamics of Equilibrium in Tourism  Given relatively inelastic supply, the result is a standard cobweb of oscillations, as depicted in the figure above leading to a stable equilibrium (or rather a set of equilibrium for different seasons), at least until seasonal patterns change.  With the original price level at P 1 in the expectation of demand Q 1, tourists actually demand only Q 2.

31 31 6. The Dynamics of Equilibrium in Tourism  When this happens, suppliers adjust price to P 2 which stimulates demand.  Provided supply is inelastic compared with demand, the oscillations (fluctuations) progressively reduce to a stable short run equilibrium.

32 32 End of Slides


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