Chapter 4 Tourism Economics Its Tourism Concepts and

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 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 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 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 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 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, 2 nd 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]