Download Chapter 1

Chapter 4
Tourism Economics
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Objectives
• After reading and studying this
chapter, you should be able to:
– Explain the relationship between tourism
and economics
• Theories of micro- and macroeconomics
– Describe the law of demand and law of
supply of tourism services
• Variables affecting these factors
• Concept of equilibrium
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Objectives (cont’d.)
– Discuss pricing of tourism services
– List and describe costs and benefits of
tourism for a host community
– Explain input–output analysis, and other
means of assessing the economic
impact of tourism
• Discuss the impact on the U.S.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Introduction
• Modern economic thought began with
Adam Smith
– The Wealth of Nations (1776)
• Presented concepts of aggregate supply
and demand, and increased productivity
resulting from specialization
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Introduction (cont’d.)
• All economic questions arise because
we want more than we get
– Peaceful and secure world
– Clean air, lakes, and rivers
– Long and healthy lives
– Good schools, colleges, and universities
– Spacious and comfortable homes
– Time with our friends
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Introduction (cont’d.)
• What each one of us gets is limited
by:
– Time
– Incomes we earn
– Prices we must pay
• Scarcity:
– Inability to satisfy all our wants
• We all face scarcity
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Introduction (cont’d.)
• Economics:
– A social science that examines how
society chooses to allocate scarce
resources
• Microeconomics:
– Economic activity of individual
consumers, firms, and industries
• Macroeconomics:
– All economic activity of a specific area
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Tourism Demand and Supply
• Demand side is concerned with how
buyers act
– Quantity demanded is how much buyers
want to buy at current price
– Demand indicates different quantities
demanded at different prices
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Demand and Supply (cont’d.)
• Law of demand
– Price and quantity demanded are
inversely related
• As price increases, quantity demanded
decreases, and the opposite case also holds
• Demand curves or schedules
– Show different quantities demanded at
different prices, holding other relevant
variables constant
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Demand and Supply (cont’d.)
Figure 4–1 • The Relationship of Supply
and Demand
It’s Tourism: Concepts and Practices
John Walker
Figure 4–2 • An Increase in Tourism Demand
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Demand and Supply (cont’d.)
Figure 4-3 • The Elastics of Demand, Income Elasticities, and Cross-Price Elasticities
Sources: a Principles of Economics. By Arthur O’Sullivan and Steven Sheffrin, Prentice Hall, 2002. ; B “A survey of recent
estimates of price elasticities of demand for transport.” By Jong Say Yong, W. G. Waters, and Tae H. Oum; The World Bank, Policy
Research Working Paper Series: 359, 1990.; C “Lodging Demand for Urban Hotels in Major Metropolitan Markets.” By Linda
Canina and Steven Carvell, Journal of Hospitality & Tourism Research 2005; 29. ; D Recreation Economic Decisions, 2nd edition.
By John Loomis and Richard Walsh, Venture, 1997.; E “Long-Run Structural Tourism Demand Modeling: An Application to
France.” By Ramesh Durbarry, University of Nottingham TTRI Working Paper, 2002.; F “The Restaurant and Fast Food Race:
Who’s Winning?” By Douglas M. Brown, Southern Economic Journal, 1990; 56.; G National Transport Model- Working Paper 3,
UK Department for Transport.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Elasticity of Demand
• Major determinants of price elasticity:
– Availability and quality of substitute
products
– Status of product (necessity or a
luxury?)
– Share of income spent on the product
– Amount of time available to consumers
to adjust to the price change
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Elasticity of Demand (cont’d.)
• It is crucial for suppliers to have a
good estimate of the price elasticity
– Informed decisions on pricing
• Elasticity is related to total revenue
– If demand is elastic, lowering price will
increase revenue
– If a supplier lowers price when demand
is inelastic, total revenue will decrease
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Elasticity of Demand (cont’d.)
• Any variable that affects demand has
a corresponding elasticity
– Cross-price elasticity
• Measures how sensitive demand for one
good or service is to changes in price of a
related good or service
– Income elasticity
• Measures how sensitive demand is to
changes in income.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Supply
• Supply
– Various quantities supplied at all
different prices, holding all other relevant
variables constant
• Law of supply
– States that the quantity of a good
supplies rises as market price rises, and
falls as the price falls
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Supply (cont’d.)
Figure 4–4 • Tourism Supply Curve
• Supply curves
– Upward sloping—as price increases, so does the
quantity supplied
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Equilibrium Price
• The price at which quantity
demanded equals quantity supplied
– Market supply of a product depends on:
• Cost of making the product or service
– If costs increase, supply decreases
– If costs decrease, supply increases
• Number and size of producers making it
– If companies enter or expand, supply increases
– If firms exit or downsize, supply deceases
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Equilibrium Price (cont’d.)
Figure 4–5 • The equilibrium is the point at which the buyer and seller agree on a price
for goods or services.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Equilibrium Price (cont’d.)
• Law of supply and demand
– If prices are allowed to adjust, they move
toward the equilibrium
– Combinations:
•
•
•
•
Only demand changes
Only supply changes
Supply and demand change in the same direction
Supply and demand change in opposite directions
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Equilibrium Price (cont’d.)
Figure 4–6 • Effects of Price and Quantity from a Supply or Demand Shift
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Equilibrium Price (cont’d.)
Figure 4–7 • Effects on Price and Output of a Simultaneous Change in Supply and Demand
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
How to Price Tourism Services
• Demand-based pricing
– Based upon demand
• Not production costs
• Break-even point
– Point at which sales just cover costs
• No profit or loss is made, but as sales
increase, profit is made
• Include fixed and variable costs
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
How to Price Services (cont’d.)
• Pricing in the tourism industry is
difficult
– Some companies have at least some
market power (ability to influence price)
• For most companies, pricing decisions must
be made while thinking about how rival
firms will react
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
How to Price Services (cont’d.)
• Typically, price is determined by
some combination of the:
– Comparative approach
• Assesses what prices similar operations are
charging for the same or similar products
– Cost-plus approach
• Sets price as some fraction above
production costs
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
How to Price Services (cont’d.)
• Points for setting prices:
– Tourism marketing organizations
traditionally require a margin or
payment
– When pricing, all costs should be
considered, not just expenses
– There are implications to undercutting
other operators
– It is essential to assess what others are
charging
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Balance of Payments (BOP)
• A nation’s record of all economic
transactions between residents and
the rest of the world
– Indicator of economic and political
stability
– Helps investors decide whether to invest
– All money going in and out of a country
is accounted for in the BOP
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
BOP (cont’d.)
• BOP accounts:
– Current account
• Dominated by trade in goods and services
account, primary and secondary income
– Capital account
• Changes real and financial assets
– Financial account
• Financial assets and liabilities between
residents and nonresidents
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
BOP (cont’d.)
• BOP is a major indicator of a
country’s status in international trade
– Affected by the value of the U.S. dollar
compared to other currencies
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Gross Domestic Product (GDP)
• Total value of goods and services
produced in a nation
– Calculated three ways:
• By adding up the value of all the goods and
services produced
• By adding up the expenditure on goods and
services at the time of sale
• By adding up producers’ incomes from the
sale of goods or services
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
GDP (cont’d.)
• GDP is difficult to measure precisely
– Every country has an unofficial economy
• Transactions not reported to the government
• Consumption is the largest
component
• GDP is used as a(n):
– Indicator of economic health of a country
– Gauge a country’s standard of living
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Costs and Benefits of Tourism
• Tourism affects the economy of a
destination area
– Benefits of a large tourism sector are
debatable
• Using resources to build a tourism sector
means fewer resources for other sectors
• Costs must be included when estimating
tourism’s effect on a city, region, state, or
nation
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Costs and Benefits (cont’d.)
• Cost-benefit analysis answers:
– If short-term economic benefits of
providing the service outweigh economic
costs
– Effects on long-term growth
• When measuring costs, the net
benefit of an action is often subject to
debate
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Costs and Benefits (cont’d.)
• Other considerations:
– Tourism taxes as tangible benefits
• Departure, admission , and transient
occupancy taxes
– Impact on quality of life
• Negative effects of traffic congestion, crime
rates, pollution, demand on public facilities,
etc.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Costs and Benefits (cont’d.)
• Opportunity costs
– Value of a resources in its next best use
• There are two uses for a resource
• You can only choose one
• Opportunity cost is the value of the resource
in its second use, the one you did not
choose
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
The Mixed Economy
• Tourism is not necessarily an “eitheror” proposition
– It often blends well with other
businesses
•
•
•
•
•
•
Puerto Rico and Barbados
Cape Cod
Las Vegas
New York
Orlando
London
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Who Benefits and by How Much?
• The first people to benefit from
tourism are likely to be the:
– Land developers
– Landowners
– Entrepreneurs providing services
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Who Benefits? (cont’d.)
• In less developed countries, capital
goods are not available locally
– Country does not reap as many benefits
from the tourist dollar as it might seem
• Cost-benefit analysis attempts to quantify
and compare the pros and cons of tourism
• Multiplier effect (i.e., ripple effect) tries to
measure total impact of new dollars that
enter an economy
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Figure 4–8 • The Ripple Effect
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Who Benefits? (cont’d.)
• Import propensity is the percentage of
the tourist dollar sent to another area
– Represents a leak from a destination
area
– Helps establish how much of the tourist
dollar remains at the destination
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Cost of Public Services
• Growing tourism sector increases the
demand for various public services
– Costs of providing services vary widely
• Public cost of immigrant workers
– If workers must be brought in, the initial
cost to the community is high
– Additional public services may be
needed
• Unskilled or semiskilled
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Assessing Economic Impact
• Visitor spending is often assessed
through visitor surveys
– Spending impacts:
• Spending by visitors
• Durable goods purchased by visitors and
households in the area
• Government or organizational spending
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Economic Impact (cont’d.)
• Tourism satellite accounts
– Annually measures significance of
tourism’s economic impacts on national
economies
– International standard for measuring the
contribution of tourism to an economy
– Based on the need for a framework that
will provide consistency
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Economic Impact (cont’d.)
• Basic aggregates of demand in the
TSA
– Travel and tourism consumption
• Value of products and services consumed
by visitors
– Travel and tourism demand
• Builds on travel and tourism consumption
• Includes products and services associated
with residual components of final demand
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Economic Impact (cont’d.)
– Travel and tourism demand residual
elements:
•
•
•
•
•
Government expenditures
Capital investment
Exports (nonvisitor)
Taxation
T&T Industries Employment
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Types of Visitors
• Region may be defined by a map or
as a given radius from a destination
site
– To identify regional flows of dollars:
• Residents must be separated
• Visitors are put into segments
–
–
–
–
Residents and nonresidents
Overnight and day visitors
Type of lodging
Transportation
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Types of Visitors (cont’d.)
• Units of analysis vary
– Number of individuals in the group
– Time period covered
• Arrival projections
– 2007: international tourist arrivals grew
by 6% (nearly 900 million)
• Almost 52 million more than 2006
– UNWTO’s Tourism 2020 Vision forecasts
international arrivals will reach nearly 1.6 billion
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Trends
• Travel Industry Association of
America
– Confirms that tourism continues to be
big business for the U.S.
• Reason for growth is U.S. and the world’s
economy
• Decline in U.S. dollar value will likely cause
fewer U.S. citizens visiting other countries
– Many more travelers visiting the U.S.
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]
Trends (cont’d.)
• Huge sums of money are spent on
tourism and related goods and
services
– Taxes generated as a result must be
proportionate
• As domestic and international travel in the
U.S. has continued to increase, so have tax
revenues
It’s Tourism: Concepts and Practices
John Walker
Copyright ©2011 by Pearson Education, Inc.
publishing as Pearson [imprint]