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Chapter 4                                         Tourism EconomicsIt’s Tourism: Concepts and Practices           Copyrigh...
Objectives• After reading and studying this  chapter, you should be able to:  – Explain the relationship between tourism  ...
Objectives (cont’d.)– Discuss pricing of tourism services– List and describe costs and benefits of  tourism for a host com...
Introduction• Modern economic thought began with  Adam Smith  – The Wealth of Nations (1776)    • Presented concepts of ag...
Introduction (cont’d.)• All economic questions arise because  we want more than we get  – Peaceful and secure world  – Cle...
Introduction (cont’d.)• What each one of us gets is limited  by:  – Time  – Incomes we earn  – Prices we must pay• Scarcit...
Introduction (cont’d.)• Economics:  – A social science that examines how    society chooses to allocate scarce    resource...
Tourism Demand and Supply• Demand side is concerned with how  buyers act  – Quantity demanded is how much buyers    want t...
Demand and Supply (cont’d.)• Law of demand  – Price and quantity demanded are    inversely related     • As price increase...
Demand and Supply (cont’d.)Figure 4–1 • The Relationship of Supply               Figure 4–2 • An Increase in Tourism Deman...
Demand and Supply (cont’d.)Figure 4-3 • The Elastics of Demand, Income Elasticities, and Cross-Price ElasticitiesSources: ...
Elasticity of Demand• Major determinants of price elasticity:  – Availability and quality of substitute    products  – Sta...
Elasticity of Demand (cont’d.)• It is crucial for suppliers to have a  good estimate of the price elasticity  – Informed d...
Elasticity of Demand (cont’d.)• Any variable that affects demand has  a corresponding elasticity  – Cross-price elasticity...
Supply• Supply  – Various quantities supplied at all    different prices, holding all other relevant    variables constant...
Supply (cont’d.)                                Figure 4–4 • Tourism Supply Curve• Supply curves  – Upward sloping—as pric...
Equilibrium Price• The price at which quantity  demanded equals quantity supplied  – Market supply of a product depends on...
Equilibrium Price (cont’d.)Figure 4–5 • The equilibrium is the point at which the buyer and seller agree on a pricefor goo...
Equilibrium Price (cont’d.)• Law of supply and demand  – If prices are allowed to adjust, they move    toward the equilibr...
Equilibrium Price (cont’d.)Figure 4–6 • Effects of Price and Quantity from a Supply or Demand ShiftIt’s Tourism: Concepts ...
Equilibrium Price (cont’d.)Figure 4–7 • Effects on Price and Output of a Simultaneous Change in Supply and Demand         ...
How to Price Tourism Services• Demand-based pricing  – Based upon demand    • Not production costs• Break-even point  – Po...
How to Price Services (cont’d.)• Pricing in the tourism industry is  difficult  – Some companies have at least some    mar...
How to Price Services (cont’d.)• Typically, price is determined by  some combination of the:  – Comparative approach     •...
How to Price Services (cont’d.)• Points for setting prices:  – Tourism marketing organizations    traditionally require a ...
Balance of Payments (BOP)• A nation’s record of all economic  transactions between residents and  the rest of the world  –...
BOP (cont’d.)• BOP accounts:  – Current account    • Dominated by trade in goods and services      account, primary and se...
BOP (cont’d.)• BOP is a major indicator of a  country’s status in international trade  – Affected by the value of the U.S....
Gross Domestic Product (GDP)• Total value of goods and services  produced in a nation  – Calculated three ways:    • By ad...
GDP (cont’d.)• GDP is difficult to measure precisely  – Every country has an unofficial economy     • Transactions not rep...
Costs and Benefits of Tourism• Tourism affects the economy of a  destination area  – Benefits of a large tourism sector ar...
Costs and Benefits (cont’d.)• Cost-benefit analysis answers:  – If short-term economic benefits of    providing the servic...
Costs and Benefits (cont’d.)• Other considerations:  – Tourism taxes as tangible benefits     • Departure, admission , and...
Costs and Benefits (cont’d.)• Opportunity costs  – Value of a resources in its next best use    • There are two uses for a...
The Mixed Economy• Tourism is not necessarily an “either-  or” proposition  – It often blends well with other    businesse...
Who Benefits and by How Much?• The first people to benefit from  tourism are likely to be the:  – Land developers  – Lando...
Who Benefits? (cont’d.)• In less developed countries, capital  goods are not available locally  – Country does not reap as...
Figure 4–8 • The Ripple EffectIt’s Tourism: Concepts and Practices               Copyright ©2011 by Pearson Education, Inc...
Who Benefits? (cont’d.)• Import propensity is the percentage of  the tourist dollar sent to another area  – Represents a l...
Cost of Public Services• Growing tourism sector increases the  demand for various public services  – Costs of providing se...
Assessing Economic Impact• Visitor spending is often assessed  through visitor surveys  – Spending impacts:     • Spending...
Economic Impact (cont’d.)• Tourism satellite accounts  – Annually measures significance of    tourism’s economic impacts o...
Economic Impact (cont’d.)• Basic aggregates of demand in the  TSA  – Travel and tourism consumption    • Value of products...
Economic Impact (cont’d.)– Travel and tourism demand residual  elements:  •   Government expenditures  •   Capital investm...
Types of Visitors• Region may be defined by a map or  as a given radius from a destination  site  – To identify regional f...
Types of Visitors (cont’d.)• Units of analysis vary  – Number of individuals in the group  – Time period covered• Arrival ...
Trends• Travel Industry Association of  America  – Confirms that tourism continues to be    big business for the U.S.     ...
Trends (cont’d.)• Huge sums of money are spent on  tourism and related goods and  services  – Taxes generated as a result ...
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  1. 1. Chapter 4 Tourism EconomicsIt’s Tourism: Concepts and Practices Copyright ©2011 by Pearson Education, Inc.John Walker publishing as Pearson [imprint]
  2. 2. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  3. 3. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  4. 4. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  5. 5. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  6. 6. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  7. 7. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  8. 8. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  9. 9. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  10. 10. Demand and Supply (cont’d.)Figure 4–1 • The Relationship of Supply Figure 4–2 • An Increase in Tourism Demandand Demand It’s Tourism: Concepts and Practices Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  11. 11. Demand and Supply (cont’d.)Figure 4-3 • The Elastics of Demand, Income Elasticities, and Cross-Price ElasticitiesSources: a Principles of Economics. By Arthur O’Sullivan and Steven Sheffrin, Prentice Hall, 2002. ; B “A survey of recentestimates 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.” ByLinda Canina and Steven Carvell, Journal of Hospitality & Tourism Research 2005; 29. ; D Recreation Economic Decisions, 2ndedition. By John Loomis and Richard Walsh, Venture, 1997.; E “Long-Run Structural Tourism Demand Modeling: An Applicationto 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  12. 12. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  13. 13. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  14. 14. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  15. 15. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  16. 16. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  17. 17. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  18. 18. Equilibrium Price (cont’d.)Figure 4–5 • The equilibrium is the point at which the buyer and seller agree on a pricefor goods or services. It’s Tourism: Concepts and Practices Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  19. 19. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  20. 20. Equilibrium Price (cont’d.)Figure 4–6 • Effects of Price and Quantity from a Supply or Demand ShiftIt’s Tourism: Concepts and Practices Copyright ©2011 by Pearson Education, Inc.John Walker publishing as Pearson [imprint]
  21. 21. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  22. 22. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  23. 23. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  24. 24. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  25. 25. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  26. 26. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  27. 27. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  28. 28. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  29. 29. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  30. 30. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  31. 31. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  32. 32. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  33. 33. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  34. 34. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  35. 35. The Mixed Economy• Tourism is not necessarily an “either- or” 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  36. 36. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  37. 37. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  38. 38. Figure 4–8 • The Ripple EffectIt’s Tourism: Concepts and Practices Copyright ©2011 by Pearson Education, Inc.John Walker publishing as Pearson [imprint]
  39. 39. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  40. 40. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  41. 41. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  42. 42. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  43. 43. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  44. 44. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  45. 45. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  46. 46. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  47. 47. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
  48. 48. 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 Copyright ©2011 by Pearson Education, Inc. John Walker publishing as Pearson [imprint]
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