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  1. 1. Introduction to Tourism Economics UNIT 1: INTRODUCTION TO TOURISM ECONOMICS Chapter objectives • Understand the characteristics of economic standardized measures including GDP, FDI and BOP • Explore the general concept of economic trends such as recession and inflation, standards of living, as well as import and export activitiesThe Development of an Economic SocietyIt is a process of change that is focused on the betterment of the community, state and nation.Economic is viewed as the foundation for building a prosperous society. Thus, economicdevelopment is one of the goals for the successful country, state or city.Standardized measures of an economic development are used to identify the status of one country,state or local community. Standardized measures include: • GDP (Gross Domestic Product) • FDI (Foreign Domestic Investment) • BOP (Balance of Payments) • And othersGross Domestic Products (GDP)Gross domestic product (GDP) refers to the market value of all final goods and services producedwithin a country in a given period. GDP per capita is often considered an indicator of a countrysstandard of living; GDP per capita is not a measure of personal income.It is not to be confused with Gross National Product (GNP) which allocates production based onownership - Gross domestic product is related to national accounts, a subject in macroeconomics.A basic measurement of a country’s economic performance and is the market value of all finalgoods and services made within the borders and a nation in a year.GDP can be measured as: • The sum of value added by all producers • The sum of income claims generated in producing goods and services • The spending of final goods and services producedDetermining GDPGDP can be determined in three ways, all of which should, in principle, give the same result. Theyare the product (or output) approach, the income approach, and the expenditure approach. The mostdirect of the three is the product approach, which sums the outputs of every class of enterprise toarrive at the total.The expenditure approach works on the principle that all of the product must be bought bysomebody, therefore the value of the total product must be equal to peoples total expenditures inbuying things. The income approach works on the principle that the incomes of the productive ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  2. 2. Introduction to Tourism Economicsfactors ("producers," colloquially) must be equal to the value of their product, and determines GDPby finding the sum of all producers incomesExample: the expenditure method:GDP = private consumption + gross investment + government spending + (exports − imports)Note: "Gross" means that GDP measures production regardless of the various uses to which thatproduction can be put. Production can be used for immediate consumption, for investment in newfixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDPmeasures production that takes place within the countrys borders. In the expenditure-methodequation given above, the exports-minus-imports term is necessary in order to null out expenditureson things not produced in the country (imports) and add in things produced but not sold in thecountry (exports).Economists (since Keynes) have preferred to split the general consumption term into two parts;private consumption, and public sector (or government) spending.Two advantages of dividing total consumption this way in theoretical macroeconomics are: • Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption. • If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. 1. Production approach "Market value of all final goods and services calculated during 1 year." The production approach is also called as Net Product or Value added method. This method consists of three stages: • Estimating the Gross Value of domestic Output in various economic activities; • Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally • Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output. Symbolically, Gross Value Added = Value of output – Value of Intermediate Consumption. Value of Output = Value of the total sales of goods and services + Value of changes in the inventories. The sum of Gross Value Added in various economic activities is known as GDP at factor cost. GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price. For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two methods: • By multiplying the output of each sector by their respective market price and adding them together and • By collecting data on gross sales and inventories from the records of companies and adding them together. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  3. 3. Introduction to Tourism Economics Subtracting each sectors intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost. Adding indirect tax less subsidies in GDP at factor cost, we get GDP at Producer Prices.2. Income approach "sum total of incomes of individual living in a country during 1 year." If GDP is calculated this way it is sometimes called Gross Domestic Income (GDI), or GDP(I). GDI should provide the same amount as the expenditure method described above. This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship. The US "National Income and Expenditure Accounts" divide incomes into five categories: • Wages, salaries, and supplementary labour income • Corporate profits • Interest and miscellaneous investment income • Farmers’ income • Income from non-farm unincorporated businesses Two adjustments must be made to get GDP: • Indirect taxes minus subsidies are added to get from factor cost to market prices. • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product. Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is: GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports GDP = COE + GOS + GMI + TP & M – SP & M • Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs. • Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS. • Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.3. Expenditure approach "All expenditure incurred by individual during 1 year." In economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production - This is known as the expenditure method of calculating GDP. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  4. 4. Introduction to Tourism Economics this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.Components of GDP by expenditureComponents of U.S. GDPGDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and NetExports (X – M). Y = C + I + G + (X − M)Here is a description of each GDP component: • C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. • I (investment) includes business investment in equipments for example and does not include exchanges of existing assets. Spending by households (not government) on new houses is also included in Investment. • G (government spending) is the sum of government expenditures on final goods and services. • X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations consumption, therefore exports are added. • M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.Foreign Domestic InvestmentFDI is defined as a company from one country making a physical investment into building a factoryin another country – thus, it is a measure of foreign ownership of productive assets, such asfactories, mines and land.Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lastingmanagement interest (10 percent or more of voting stock) in an enterprise operating in an economyother than that of the investor. It is the sum of equity capital,other long-term capital, and short-termcapital as shown in the balance of payments.It usually involves participation in management, joint-venture, transfer of technology and expertise.There are two types of FDI: inward foreign direct investment and outward foreign directinvestment, resulting in a net FDI inflow (positive or negative) and "stock of foreign directinvestment", which is the cumulative number for a given period.Direct investment excludes investment through purchase of shares. FDI is one example ofinternational factor movements. FDIs require a business relationship between a parent company andits foreign subsidiary. Foreign direct business relationships give rise to multinational corporations.The foreign direct investor may acquire voting power of an enterprise in an economy through any ofthe following methods: • by incorporating a wholly owned subsidiary or company • by acquiring shares in an associated enterprise • through a merger or an acquisition of an unrelated enterprise ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  5. 5. Introduction to Tourism Economics • participating in an equity joint venture with another investor or enterpriseForeign direct investment incentives may take the following forms: • low corporate tax and individual income tax rates • tax holidays • other types of tax concessions • preferential tariffs • special economic zones • EPZ – Export Processing Zones • Bonded Warehouses • investment financial subsidies • soft loan or loan guarantees • free land or land subsidies • relocation & expatriation subsidies • job training & employment subsidies • infrastructure subsidies • R&D support • derogation from regulations (usually for very large projects)Balance of PaymentsBalance of payments (BOP) accounts are an accounting record of all monetary transactionsbetween a country and the rest of the world. These transactions include payments for the countrysexports and imports of goods, services, financial capital, and financial transfers.The BoP accounts summarize international transactions for a specific period, usually a year, and areprepared in a single currency, typically the domestic currency for the country concerned. Sources offunds for a nation, such as exports or the receipts of loans and investments, are recorded as positiveor surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded asnegative or deficit items. When all components of the BOP accounts are included they must sum tozero with no overall surplus or deficit.For example, if a country is importing more than it exports, its trade balance will be in deficit, butthe shortfall will have to be counter-balanced in other ways – such as by funds earned from itsforeign investments, by running down central bank reserves or by receiving loans from othercountries. While the overall BOP accounts will always balance when all types of payments areincluded, imbalances are possible on individual elements of the BOP, such as the current account,the capital account excluding the central banks reserve account, or the sum of the two.Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficitnations become increasingly indebted. The term "balance of payments" often refers to this sum: acountrys balance of payments is said to be in surplus (equivalently, the balance of payments ispositive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceeduses of funds (such as paying for imported goods and paying for foreign bonds purchased) by thatamount.Recession and InflationsRecession ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  6. 6. Introduction to Tourism EconomicsIn economics, a recession is a business cycle contraction, a general slowdown in economic activity.During recessions, many macroeconomic indicators vary in a similar way. Production, as measuredby gross domestic product (GDP), employment, investment spending, capacity utilization,household incomes, business profits, and inflation all fall, while bankruptcies and theunemployment rate rise.Recessions generally occur when there is a widespread drop in spending, often following an adversesupply shock or the bursting of an economic bubble. Governments usually respond to recessions byadopting expansionary macroeconomic policies, such as increasing money supply, increasinggovernment spending and decreasing taxation. A recession has many attributes that can occursimultaneously and includes declines in component measures of economic activity (GDP) such asconsumption, investment, government spending, and net export activity.These summary measures reflect underlying drivers such as employment levels and skills,household savings rates, corporate investment decisions, interest rates, demographics, andgovernment policies.Economist Richard C. Koo wrote that under ideal conditions, a countrys economy should have thehousehold sector as net savers and the corporate sector as net borrowers, with the governmentbudget nearly balanced and net exports near zero. When these relationships become imbalanced,recession can develop within the country or create pressure for recession in another country. Policyresponses are often designed to drive the economy back towards this ideal state of balance. A severe(GDP down by 10%) or prolonged (three or four years) recession is referred to as an economicdepression, although some argue that their causes and cures can be different.InflationIn economics, inflation is a rise in the general level of prices of goods and services in an economyover a period of time. When the general price level rises, each unit of currency buys fewer goodsand services. Consequently, inflation also reflects an erosion in the purchasing power of money – aloss of real value in the internal medium of exchange and unit of account in the economy.A chief measure of price inflation is the inflation rate, the annualized percentage change in ageneral price index (normally the Consumer Price Index) over time.Inflations effects on an economy are various and can be simultaneously positive and negative.Negative effects of inflation include a decrease in the real value of only money held and only othermonetary items only when they are not inflation-adjusted daily in terms of a Daily Consumer PriceIndex over time; e.g. all government inflation-indexed bonds in many countries are inflation-adjusted daily (they trade daily) in terms of a Daily CPI which is a lagged, daily interpolation of themonthly published Consumer Price Index.Uncertainty over future inflation may discourage investment and savings, and high inflation maylead to shortages of goods if consumers begin hoarding out of concern that prices will increase inthe future.Inflation-adjusting the entire money supply (excluding bank notes and coins which generally makeup about seven per cent of the money supply in an advanced economy) would result in zero cost ofinflation (not zero inflation) in the entire economy (excluding in bank notes and coins) undercomplete co-ordination.Positive effects include ensuring central banks can adjust nominal interest rates (intended tomitigate recessions), and encouraging investment in non-monetary capital projects. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  7. 7. Introduction to Tourism EconomicsToday, most economists favor a low, steady rate of inflation.Low (as opposed to zero or negative) inflation reduces the severity of economic recessions byenabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquiditytrap prevents monetary policy from stabilizing the economy.The task of keeping the rate of inflation low and stable is usually given to monetary authorities.Generally, these monetary authorities are the central banks that control monetary policy through thesetting of interest rates, through open market operations, and through the setting of banking reserverequirements.Standards of LivingStandard of living is generally measured by standards such as real (i.e. inflation adjusted) incomeper person and poverty rate. A more realistic measure is the number of people who have access tofree subsistence land. Other measures such as access and quality of health care, income growthinequality and educational standards are also used. Examples are access to certain goods (such asnumber of refrigerators per 1000 people), or measures of health such as life expectancy.It is the ease by which people living in a time or place are able to satisfy their needs and/or wants.Standard of living refers to the level of wealth, comfort, material goods and necessities available toa certain socioeconomic class in a certain geographic area. The standard of living includes factorssuch as income, quality and availability of employment, class disparity, poverty rate, quality andaffordability of housing, hours of work required to purchase necessities, gross domestic product,inflation rate, number of vacation days per year, affordable (or free) access to quality healthcare,quality and availability of education, life expectancy, incidence of disease, cost of goods andservices, infrastructure, national economic growth, economic and political stability, political andreligious freedom, environmental quality, climate and safety.The standard of living is closely related to quality of life. The idea of a standard may be contrastedwith the quality of life, which takes into account not only the material standard of living, but alsoother more intangible aspects that make up human life, such as leisure, safety, cultural resources,social life, physical health, environmental quality issues etc. More complex means of measuringwell-being must be employed to make such judgements, and these are very often political, thuscontroversial.Even between two nations or societies that have similar material standards of living, quality of lifefactors may in fact make one of these places more attractive to a given individual or group.However, there can be problems even with just using numerical averages to compare materialstandards of living, as opposed to, for instance, a Pareto index (a measure of the breadth of incomeor wealth distribution). Standards of living are perhaps inherently subjective.As an example, countries with a very small, very rich upper class and a very large, very poor lowerclass may have a high mean level of income, even though the majority of people have a low"standard of living". This mirrors the problem of poverty measurement, which also tends towardsthe relative. This illustrates how distribution of income can disguise the actual standard of living.Likewise Country A, a perfectly socialist country with a planned economy with very low averageper capita income would receive a higher score for having lower income inequality than Country Bwith a higher income inequality, even if the bottom of Country Bs population distribution had ahigher per capita income than Country A. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  8. 8. Introduction to Tourism EconomicsReal examples of this include former East Germany compared to former West Germany or NorthKorea compared to South Korea. In each case, the socialist country has a low income discrepancy(and therefore would score high in that regard), but lower per capita incomes than a large majorityof their neighboring counterpart. This can be avoided by using the measure of income at variouspercentiles of the population rather than a highly relative and controversial overall incomeinequality measure.Import and ExportImportThe term import is derived from the conceptual meaning as to bring in the goods and services intothe port of a country. The buyer of such goods and services is referred to an "importer" who isbased in the country of import whereas the overseas based seller is referred to as an "exporter".Thus an import is any good (e.g. a commodity) or service brought in from one country to anothercountry in a legitimate fashion, typically for use in trade. It is a good that is brought in from anothercountry for sale. Import goods or services are provided to domestic consumers by foreignproducers."Imports" consist of transactions in goods and services (sales, barter, gifts or grants) from non-residents residents to residents. - The exact definition of imports in national accounts includes andexcludes specific "borderline" cases.A general delimitation of imports in national accounts is given below: • An import of a good occurs when there is a change of ownership from a non-resident to a resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also smuggled goods must be included in the import measurement. • Imports of services consist of all services rendered by non-residents to residents. In national accounts any direct purchases by residents outside the economic territory of a country are recorded as imports of services; therefore all expenditure by tourists in the economic territory of another country are considered as part of the imports of services. Also international flows of illegal services must be included.There are two basic types of import: • Industrial and consumer goods • Intermediate goods and servicesCompanies import goods and services to supply to the domestic market at a cheaper price and betterquality than competing goods manufactured in the domestic market. Companies import productsthat are not available in the local market. There are three broad types of importers: • Looking for any product around the world to import and sell. • Looking for foreign sourcing to get their products at the cheapest price. • Using foreign sourcing as part of their global supply chain.Export ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  9. 9. Introduction to Tourism EconomicsThis term export is derived from the conceptual meaning as to ship the goods and services out ofthe port of a country. The seller of such goods and services is referred to as an "exporter" who isbased in the country of export whereas the overseas based buyer is referred to as an "importer".In International Trade, "exports" refers to selling goods and services produced in home country toother markets. Any good or commodity, transported from one country to another country in alegitimate fashion, typically for use in trade. Export goods or services are provided to foreignconsumers by domestic producersIn national accounts "exports" consist of transactions in goods and services (sales, barter, gifts orgrants) from residents to non-residents.A general delimitation of exports in national accounts is given below: • An export of a good occurs when there is a change of ownership from a resident to a non- resident; this does not necessarily imply that the good in question physically crosses the frontier. However, in specific cases national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Also smuggled goods must be included in the export measurement. • Export of services consist of all services rendered by residents to non-residents. In national accounts any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore all expenditure by foreign tourists in the economic territory of a country is considered as part of the exports of services of that country. Also international flows of illegal services must be included. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  10. 10. Introduction to Tourism Economics UNIT 2: PATTERNS OF DEMAND FOR TOURISM Chapter objectives • Discuss the historical trends in tourism economics: economic, social and infrastructural development, as well as industrialization, cross-border movement and government regulations • Understand the regional dimensions and European popularity in tourism economics • Explore seasonality aspects and its application in tourism economics • Identify the lifestyle and lifecycle determinants that may impact the tourism economicsHistorical trendsHistorical Trend Analysis (HTA) is a geomorphologic tool which utilizes the analysis of datarelating to a particular physical process or morphologic feature from different time periods, in orderto identify directional trends, and if quantifiable, rates of changes in that process or feature. Anoverview of tourism’s historical development is required in order to fully appreciate today’s moderntourism environment and to understand the challenges of the globalized economy.The history of tourism cannot be easily traced; back in the ancient years, as ancient world empiresgrew in Africa, Asia and the Middle East, the infrastructure necessary for travel such as land routesand water ways was created and vehicles and other means for travel were developed. Mosthistorians of tourism have tended to focus on Europe, from the Greeks and Romans, to the railwayand Thomas Cook in the UK.Thomas Cook has been the so called “father of the tourist trade”, since, on July 5th 1841, hearranged to take a group of about 500 members of his local “Temperance Society” from LeicesterLondon Road railway station to a rally in Loughborough, eleven miles away, having arranged withthe rail company to charge one shilling per person that included rail tickets and food for this trainjourney.When industrialization across Europe gave rise to an affluent middle class with an increasingamount of free time, tourism began to take shape as an international industry.However, for the most part of the 19th century it has been expensive and limited to a small numberof destinations. When in the 1960’s a growing number of people had disposable incomes and thedesire for “something new”, reasonably priced commercial aircrafts airplanes made internationaltravel easier; mass tourism had arrived.Economic DevelopmentEconomic development generally refers to the sustained, concerted actions of policymakers andcommunities that promote the standard of living and economic health of a specific area. Suchactions can involve multiple areas including development of human capital, critical infrastructure, ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  11. 11. Introduction to Tourism Economicsregional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, andother initiatives.Economic development typically involves improvements in a variety of indicators such as literacyrates, life expectancy, and poverty rates. Essentially, a countrys economic development is related toits human development, which encompasses, among other things, health and education. Thesefactors are, however, closely related to economic growth so that development and growth often gotogether.Social DevelopmentSocial development can be summarily described as the process of organizing human energies andactivities at higher levels to achieve greater results. Development increases the utilization of humanpotential. Social development consists of two interrelated aspects – learning and application.Society discovers better ways to fulfill its aspirations and it develops organizational mechanisms toexpress that knowledge to achieve its social and economic goals. • The process of discovery expands human consciousness. • The process of application enhances social organization.Society develops in response to the contact and interaction between human beings and theirmaterial, social and intellectual environment.Infrastructural DevelopmentInfrastructure development contributes to poverty reduction by spurring economic growth,stimulating enterprise opportunities, generating employment and providing poor people with accessto basic needs.Example: Australia’s approach to infrastructure will centre on four pillars: • Delivering sustainable transport infrastructure • Facilitating increased access to basic water and sanitation infrastructure services • Creating reliable energy services and supporting information and communication technologies • Supporting urban infrastructure planning and development.The development and maintenance of essential public infrastructure is an important ingredient forsustained economic growth and poverty reduction. Health, education, and efficient water andsanitation services help lay the groundwork for a more productive, healthy population capable ofcontributing to sustained economic growth - Likewise transport infrastructure improves access toservices and markets in rural areas.IndustrializationIndustrialization (or industrialization) is the process of social and economic change thattransforms a human group from an agrarian society into an industrial one. It is a part of a widermodernization process, where social change and economic development are closely related withtechnological innovation, particularly with the development of large-scale energy and metallurgyproduction. It is the extensive organization of an economy for the purpose of manufacturing. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  12. 12. Introduction to Tourism EconomicsIndustrialization also introduces a form of philosophical change where people obtain a differentattitude towards their perception of nature, and a sociological process of ubiquitous rationalization.The first country to industrialize was the United Kingdom during the Industrial Revolutioncommencing in the eighteenth century. By the end of the 20th century, East Asia had become one ofthe most recently industrialized regions of the worldCross-border MovementAlso known as economic globalization - Economic globalization refers to increasing economicinterdependence of national economies across the world through a rapid increase in cross-bordermovement of goods, service, technology and capital.Whereas globalization is centered around the diminution of international trade regulations as well astariffs, taxes, and other impediments that suppresses global trade, economic globalization is theprocess of increasing economic integration between countries, leading to the emergence of a globalmarketplace or a single world market.Depending on the paradigm, economic globalization can be viewed as either a positive or a negativephenomenon. Economic globalization comprises the globalization of production, markets,competition, technology, and corporations and industries.Governmental RegulationsRegulation is administrative legislation that constitutes or constrains rights and allocatesresponsibilities. It can be distinguished from primary legislation (by Parliament or electedlegislative body) on the one hand and judge-made law on the other.Regulation mandated by a state attempts to produce outcomes which might not otherwise occur,produce or prevent outcomes in different places to what might otherwise occur, or produce orprevent outcomes in different timescales than would otherwise occur. In this way, regulations canbe seen as implementation artifacts of policy statements.Common examples of regulation include controls on market entries, prices, wages, developmentapprovals, pollution effects, employment for certain people in certain industries, standards ofproduction for certain goods, the military forces and services. The economics of imposing orremoving regulations relating to markets is analyzed in regulatory economics.Regional dimensionsRegional development is fundamentally about economic development and reforms that allowmarkets to work and individuals and communities to enhance their wellbeing. Regional tradeintegration can serve as a powerful catalyst to economic growth. Regional trade agreementscontinue to proliferate despite being economically inferior from a global perspective tonondiscriminatory trade liberalization on a most-favored-nation (MFN) basis.Multilateral liberalization and regional integration will continue to coexist in the future. The role ofregional development policy ought to be to support regions to grow while ensuring that individualsare able to best manage their transition to a more diversified economic base - to other centres thatare growing with new employment and lifestyle opportunities. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  13. 13. Introduction to Tourism EconomicsThe choice of forming a customs union first and then acceding to the WTO (World TradeOrganization) could increase the overall level of trade protection of customs union memberscompared to their level of protection prior to the customs union. The larger the customs union themore the collective monopoly power it has in commanding a high level of protection. The incentiveto protect is particularly strong if there is a country with greater bargaining power within the regionand higher external tariff rates.The reason is that, in the case of heterogeneous countries, the higher external tariff of the dominantcountry is likely to prevail as a Common External Tariff (CET) for the group. In this case,implementation of the customs union implies that the more liberal countries will eventuallyconverge toward the higher rates.By entering first into a regional agreement, a country may increase its bargaining power inmultilateral negotiations by having a common (regional) position toward sensitive issues (e.g.,textile and agriculture), where developed countries still maintain a protectionist stance, although itis not obvious, a priori, that the outcome would reflect the preferences of custom unions’ smallermembers.Example:On September 19, 2003 Belarus, Kazakhstan, the Russian Federation, and Ukraine met in Yalta tosign a draft agreement to create a CES over 5–7 years.The process involves three stages: • the coordination of customs duties and harmonization of trade and custom regulations; • the lifting of current trade barriers and creation of the customs union; and • the liquidation of internal customs boundaries to be replaced by a common customs boundary and the creation of a supra-national regulating institution.European popularityThe history and theory of popular culture in Western Europe - Different regions, ethnicities andracial identities were represented in and by popular culture. The culture of Europe might better bedescribed as a series of multiple cultures.Whether it is a question of North as opposed to South; West as opposed to East; Orthodoxism asopposed to Protestantism as opposed to Catholicism as opposed to Secularism; many have claimedto identify cultural fault lines across the continent.There are many cultural innovations and movements, often at odds with each other, such asChristian proselytism or Humanism. Thus the question of "common culture" or "common values" isfar more complex then it seems to be.The foundation of European culture was laid by the Greeks, strengthened by the Romans, stabilizedby Christianity, reformed and modernized by the fifteenth-century Renaissance and Reformationand globalized by successive European empires between the sixteenth and twentieth centuries.Thus the European Culture developed into a very complex phenomenon of wider range ofphilosophy, Christian and secular humanism, rational way of life and logical thinking developedthrough a long age of change and formation with the experiments of enlightenment, naturalism,romanticism, science, democracy, and socialism. Because of its global connection, the Europeanculture grew with an all-inclusive urge to adopt, adapt and ultimately influence other trends ofculture. Examples of popular culture are like art, music, literature, cuisine, etc. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  14. 14. Introduction to Tourism EconomicsSeasonalityIn statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, orperiodic fluctuations. This variation can be either regular or semi regular and very common ineconomic time series. Example: retail sales tend to peak during holiday season and then declineafter the holidays.Seasonal variation is a component of a time series which is defined as the repetitive and predictablemovement around the trend line in one year or less. It is detected by measuring the quantity ofinterest for small time intervals, such as days, weeks, months or quarters. Organizations affected byseasonal variation need to identify and measure this seasonality to help with planning for temporaryincreases or decreases in labor requirements, inventory, training, periodic maintenance, and soforth.There are several main reasons for studying seasonal variation • The description of the seasonal effect provides a better understanding of the impact this component has upon a particular series. • After establishing the seasonal pattern, methods can be implemented to eliminate it from the time-series to study the effect of other components such as cyclical and irregular variations. This elimination of the seasonal effect is referred to as deseasonalizing or seasonal adjustment of data. • To project the past patterns into the future knowledge of the seasonal variations is a must for the prediction of the future trends.A decision maker or analyst can make one of the following assumptions when treating the seasonalcomponent: • The impact of the seasonal component is constant from year to year. • The seasonal effect is changing slightly from year to year. • The impact of the seasonal influence is changing dramatically.Lifestyle determinantsLifestyle is a term to describe the way a person or an animal lives. A set of behaviors, and thesenses of self and belonging which these behaviors represent, are collectively used to define a givenlifestyle. The term is defined more broadly when used in politics, marketing, and publishing.A lifestyle is a characteristic bundle of behaviors that makes sense to both others and oneself in agiven time and place, including social relations, consumption, entertainment, and dress. Thebehaviors and practices within lifestyles are a mixture of habits, conventional ways of doing things,and reasoned actions. The lifestyle determinants include: culture, economic, income, politicalenvironments, social, and demographyCultureCulture and lifestyle are the major factors affecting how we talk, dress, relate with and treat people,how we eat and live. Lifestyle affects culture and culture affects lifestyles in the society. Culturecan be known as a complex whole which includes knowledge, belief, art, law, moral, customs andany other capabilities and habits acquired by man as a member of a society.Culture is a term that has many different inter-related meanings. As mention above, the word"culture" is most commonly used in three basic senses: • Excellence of taste in the fine arts and humanities, also known as high culture ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  15. 15. Introduction to Tourism Economics • An integrated pattern of human knowledge, belief, and behavior that depends upon the capacity for symbolic thought and social learning • The set of shared attitudes, values, goals, and practices that characterizes an institution, organization, or groupEconomicEconomics is the social science that analyzes the production, distribution, and consumption ofgoods and services. A focus of the subject is how economic agents behave or interact and howeconomies work.Microeconomics examines the behavior of basic elements in the economy, including individualagents (such as households and firms or as buyers and sellers) and markets, and their interactions.Macroeconomics analyzes the entire economy and issues affecting it, including unemployment,inflation, economic growth, and monetary and fiscal policy.Economic analysis may be applied throughout society, as in business, finance, health care, andgovernment, but also to such diverse subjects as crime, education, the family, law, politics, religion,social institutions, war, and science.IncomeIncome is the consumption and savings opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. However, for households and individuals,"income is the sum of all the wages, salaries, profits, interests payments, rents and other forms ofearnings received... in a given period of time."For firms, income generally refers to net-profit: what remains of revenue after expenses have beensubtracted. In the field of public economics, it may refer to the accumulation of both monetary andnon-monetary consumption ability, the former being used as a proxy for total income. Nationalincome, measured by statistics such as the Net National Income (NNI), measures the total incomeof individuals, corporations, and government in the economy.PoliticThe term lifestyle in politics can often be used in conveying the idea that society be accepting of avariety of different ways of life—from the perspective that differences among ways of living aresuperficial, rather than existential.Lifestyle is also sometimes used pejoratively, to mark out some ways of living as elective orvoluntary as opposed to others that are considered mainstream, unremarkable, or normative. Politicconsists of “social relations involving authority or power” and refers to the regulation of a politicalunit, and to the methods an dtactics used to formulate and apply policy. From a historicalperspective, societies in need of government have moved from the primitive to the patriarchal stateand finally to the military, the real politics of modern timesSocial ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  16. 16. Introduction to Tourism EconomicsThe term social refers to a characteristic of living organisms as applied to populations humans andother animals. It always refers to the interaction of organisms with other organisms and to theircollective co-existence, irrespective of whether they are aware of it or not, and irrespective ofwhether the interaction is voluntary or involuntary. • The term "social" is used in many different senses, referring among other things to: • Attitudes, orientations, or behaviors which take the interests, intentions, or needs of other people into account (in contrast to anti-social behaviour) has played some role in defining the idea or the principle. • For instance terms like social realism, social justice, social constructivism, social psychology and social capital imply that there is some social process involved or considered, a process that is not there in regular, "non-social" realism, justice, constructivism, psychology, or capital.DemographicDemographics are the characteristics of a human population as used in the government, marketingor opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in termsof travel time to work or number of vehicles available), educational attainment, home ownership,employment status and even location.A demographic trend describes in a population over time i.e. the average age of a population mayincrease or decrease over time. Certain restrictions may be set in place i.e. the one child policy inChina.Marketers typically combine several variables to define a demographic profile. A demographicprofile provides enough information about the typical member of this group to create a mentalpicture of this hypothetical aggregate.Life cycle determinantsThe concept of the life cycle is widely used in social sciences - However, its meanings andapplications are diverse. Additionally, for denoting temporality in a general sense, the terms lifecycle, life span or life course are often regarded as interchangeable (O’Rand and Krecker, 1990).By considering an individuals life as a chronological sequence of stages, the life cycle can becharacterized by the occurrence of events and the length of the resulting life cycle stages. Thedevelopment of longevity and the timing of retirement are important factors shaping the life cycle.In addition to adjustments of the life cycle caused by health or disability, constraints and incentivesof the pension system are of particular importance for the evolution of life cycles; e.g., decisions onretirement age are strongly dependent and influenced by institutional factors.The design of the social security system, social policies as well as structural changes in an economyinfluence the life cycle adjustments additively to demographic changes. The additional life timeoffers opportunities to increase the length of the working life, to invest further time in education orto enjoy more time in leisureAs governmental social transfer arrangements have partially overtaken individual financial securityfunctions, policy makers have to be conscious of life cycle dynamics arising from increasing lifeexpectancy and varying retirement ages. In economic, life-cycle decisions depend on: • The cost-effectiveness of the banking sector; ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  17. 17. Introduction to Tourism Economics • Individual income uncertainty; • The persistence of an individual productivity process; • The generosity of the social security system.The effects of higher productivity process persistence on the economy are as follows: An increasein the persistence raises expected life-time earnings of high-productivity individuals and diminishesexpected income of low-productivity individuals. The former are therefore reducing theirprecautionary savings, whereas the latter are less interested in taking loans. The overall impact onthe capital-output ratio is negative, which leads to an increase in the real interest rate. UNIT 3: MACRO DETERMINANTS OF TOURISM DEMAND Chapter objectives • Identify, explore and discuss the macro-determinants of tourism demands: disposable income, educational levels, seasonality, household size, demographics variables, the buyer decision process and travel buying behaviorMacro determinants of tourism demandDeterminants of tourism demand include the following: • Disposable income • Educational levels • Seasonality • Household size • Demographic variables • The buyer decision process • Travel buying behaviorDisposable IncomeDisposable income is total personal income minus personal current taxes. In national accountsdefinitions, personal income, minus personal current taxes equals disposable personal income.Subtracting personal outlays (which includes the major category of personal (or, private)consumption expenditure) yields personal (or, private) savings.Restated, consumption expenditure plus savings equals disposable income after accounting fortransfers such as payments to children in school or elderly parents’ living arrangements. Themarginal propensity to consume (MPC) is the fraction of a change in disposable income that isconsumed.For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is65%. Restated, the marginal propensity to save is 35%.Discretionary income is money remaining after all bills are paid off. It is income after subtractingtaxes and normal expenses (such as rent or mortgage, utilities, insurance, medical, transportation,property maintenance, child support, inflation, food and sundries, etc.) to maintain a certain ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  18. 18. Introduction to Tourism Economicsstandard of living. It is the amount of an individuals income available for spending after theessentials (such as food, clothing, and shelter) have been taken care of: Discretionary income = Gross income - taxes - necessitiesDespite the definitions above, disposable income is often incorrectly used to denote discretionaryincome. Commonly, disposable income is the amount of "play money" left to spend or save. TheConsumer Leverage Ratio is the expression of the ratio of Total Household Debt to DisposableIncomeUse of discretionary income in high-income loan applicationsWhen applying for a loan (mortgage, consumer loan), lenders may take into consideration a high-income applicants discretionary income in order to assess the loan repayment capacity of theapplicant.Discretionary income provides the lender with more information on the applicants capacity to repaythan the debt-to-income ratio in the case where the applicant has a lot of debt, but also a lot ofincome, such that the percent of available income may be smaller than normal standards wouldallow, but the actual amount of money is still largeEducational LevelsEducation in its broadest, general sense is the means through which the aims and habits of a groupof people lives on from one generation to the next. Education can be defined as any act orexperience that has a formative effect on the mind, character or physical ability of an individual.Education is the process by which society deliberately transmits its accumulated knowledge, skillsand values from one generation to another – it controls decision making, lifestyle, needs, wants andetcA right to education has been created and recognized by some jurisdictions: Since 1952, Article 2 ofthe first Protocol to the European Convention on Human Rights obliges all signatory parties toguarantee the right to education. At the global level, the United Nations International Covenant onEconomic, Social and Cultural Rights of 1966 guarantees this right under its Article 13.Economics and educationIt has been argued that high rates of education are essential for countries to be able to achieve highlevels of economic growth. Empirical analyses tend to support the theoretical prediction that poorcountries should grow faster than rich countries because they can adopt cutting edge technologiesalready tried and tested by rich countries.However, technology transfer requires knowledgeable managers and engineers who are able tooperate new machines or production practices borrowed from the leader in order to close the gapthrough imitation. Therefore, a countrys ability to learn from the leader is a function of its stock of"human capital".Recent study of the determinants of aggregate economic growth have stressed the importance offundamental economic institutions and the role of cognitive skills. If more education leads to fastereconomic growth, then investments in education could pay for themselves in the long run, and ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  19. 19. Introduction to Tourism Economicscould also play a role in reducing poverty. Such reasoning could be crucial in bolstering politicalsupport for education investments and ensuring their sustainability.The following findings are highlighted: • educational quality directly affects individual earnings • early analyses have emphasised the role of quantity of schooling for economic growth • the quality of education matters even more for economic growth • improving educational quality requires a focus on institutions and efficient education spending, not just additional resources • the need to alter institutions fundamentally is inescapableMobility LevelsIs the state of being in motion. There are many types of mobility, including: • Academic mobility – the possibility for students and teachers to move between different institutions • Economic mobility - the ability of an individual, family or some other group to improve (or lower) their economic status - usually measured in income • Social mobility – the ability of individuals within a society to move between different social levels • Population mobility – migration within a populationEconomic mobilityEconomic mobility is often measured by movement between income quintiles. Economic mobilitymay be considered a type of social mobility, which is often measured in change in income. Mobilitymay be between generations ("inter-generational") or within a person or groups lifetime ("intra-generational"). - It may be "absolute" or "relative". • Inter-generational mobility compares a person’s (or groups) income to that of her/his/their parents. • Intra-generational mobility, in contrast, refers to movement up or down over the course of a working career.Absolute mobility involves widespread economic growth and answers the question “To what extentdo families improve their incomes over a generation?” Relative mobility is specific to individuals orgroups and occurs without relation to the economy as a whole. It answers the question, "howclosely are the economic fortunes of children tied to that of their parents?" - Relative mobility is azero-sum game, absolute is not.SeasonalityIn statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, orperiodic fluctuations. This variation can be either regular or semi regular and very common ineconomic time series. Example: retail sales tend to peak during holiday season and then declineafter the holidaysSeasonal variation is a component of a time series which is defined as the repetitive and predictablemovement around the trend line in one year or less. It is detected by measuring the quantity ofinterest for small time intervals, such as days, weeks, months or quarters. Organizations affected by ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  20. 20. Introduction to Tourism Economicsseasonal variation need to identify and measure this seasonality to help with planning for temporaryincreases or decreases in labor requirements, inventory, training, periodic maintenance, and soforth.There are several main reasons for studying seasonal variation • The description of the seasonal effect provides a better understanding of the impact this component has upon a particular series. • After establishing the seasonal pattern, methods can be implemented to eliminate it from the time-series to study the effect of other components such as cyclical and irregular variations. This elimination of the seasonal effect is referred to as deseasonalizing or seasonal adjustment of data. • To project the past patterns into the future knowledge of the seasonal variations is a must for the prediction of the future trends.A decision maker or analyst can make one of the following assumptions when treating the seasonalcomponent: • The impact of the seasonal component is constant from year to year. • The seasonal effect is changing slightly from year to year. • The impact of the seasonal influence is changing dramatically.Household SizeHouseholds consisting of individuals, families, community groups, business organizations, or state.Their role in economic activity are as follows: 1. As the owners of factors of production. Factors of production or production resources are owned and provided by the household. Production factors include natural resources or land, or land, labor, capital, and expertise or entrepreneurship. Production factors is a necessary component of the company in producing certain goods and services. 2. Get a reward or remuneration of factors of production they provide. As the owners of factors of production that provides paroduksi factors, the household is entitled to remuneration from the company. Remuneration will be the income for households. Fringe benefits may include salary or wages for the owners of labor, interest for the owners of capital, rent for land owners, and entrepreneurial profit for the owner. 3. Acting as a consumer. Households requiring goods and services to meet their needs. This action causes them to act as consumers who make the consumption of goods and services produced by the company. 4. Paying taxes to the government. Taxes paid to the government from some of the income received by households. In this case, households have an obligation to the government to pay taxes in accordance with applicable regulations, and the government have the full right to demand payment of taxes from households. Household taxes paid to the government will later be used for the benefit of the general public. Thus, an indirect tax payments by households to the government benefits will be felt again by the household.Demographic Variables ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  21. 21. Introduction to Tourism EconomicsDemographics are the characteristics of a human population as used in the government, marketingor opinion research. Commonly used data are sex, race, age, income, disabilities, mobility (in termsof travel time to work or number of vehicles available), educational attainment, home ownership,employment status and even locationA demographic trend describes in a population over time i.e. the average age of a population mayincrease or decrease over time. Certain restrictions may be set in place i.e. the one child policy inChina. Marketers typically combine several variables to define a demographic profile.A demographic profile provides enough information about the typical member of this group tocreate a mental picture of this hypothetical aggregate. Increased life expectancy and consequentlythe average age of population are the results of an accelerated economic growth in the modernperiod. It has been proven that as a general long-term trend, when GDP per capita increases due tobetter living, the average lifespan of the population and life expectancy increase too.The relationship between GDP and life expectancy may be analysed also in a reverse way. Namely,along with increased quality of life and life expectancy, we get an increase of the active life onpopulation; thus resulting an increase in the overall productive capacity of a country and thereforeof GDP per capitaThe Buyer Decision ProcessBuyer decision processes are the decision making processes undertaken by consumers in regard toa potential market transaction before, during, and after the purchase of a product or service. Moregenerally, decision making is the cognitive process of selecting a course of action from amongmultiple alternatives. - Common examples include shopping and deciding what to eat.A general model of the buyer decision process consists of the following steps: Need Information Evaluation of Purchase Post-purchase Recognition Search Alternatives Decision BehaviorProblem recognitionThe buying process starts when the buyer recognizes a problem or needInformation searchAn aroused consumer may or may not search for more information. How much searching aconsumer does will depend on the strength of the drive, the amount of initial information, the easeof obtaining more information, the value placed on additional information and the satisfaction onegets from searching.Evaluations of alternativesUnfortunately, there is no simple and single evaluation process used by all consumers or even byone consumer in all buying situations. There are several evaluation processes: ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  22. 22. Introduction to Tourism Economics Attitude of Others Evaluation of Purchase Purchase Alternatives Intention Decision Unexpected Situational FactorsPurchase decisionIn the evaluation stage, the consumer ranks brands in the choice set and forms purchase intentions.Generally, the consumer will buy the most preferred brandPost-purchase behaviorThe marketer’s job does not end when the customer buys a product. Following a purchase, theconsumer will be satisfied and dissatisfied and will engage in post-purchase actions of significantinterest to the marketer.Travel Buying BehaviorTravel industry is undergoing massive structural reorganization – loyalty schemes, price and brandin their buying decisions. Level of Involvement in purchase decision also increasing – importanceand intensity of interest in a product in a particular situation. Buyer’s level of involvementdetermines why he/she is motivated to seek information about a certain products and brands butvirtually ignores others Information Travel Travel Travel Felt need/ collection and decision preparation satisfaction travel desire evaluation (choice and travel outcome and image between experiences evaluation alternatives)The model suggests that there are two levels of factors that have an effect on the consumer. • The first level of influences is close to the person and includes psychological influence such as perception and learning. • The second level of influences includes those, which have been developed during the socialization process and include reference groups and family influences.All these models that have been adapted for tourism offer some into the consumer behavior processinvolved during the purchase post-purchase decision stages.Consumer Decision-Making Framework ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  23. 23. Introduction to Tourism Economics Socio- economic Cultural influences influences Motivation or Perception energizers Consumer or Decision-maker Personality/ attitude Learning Reference group Family influences influencesIn conclusion, consumer making a purchase decision will be affected by the following three (3)factors: • Personal - Unique to a particular person. Often according to demographic factors such as sex, race, age and etc • Psychological - Motive is an internal energizing force that orients a person’s activities toward satisfying a need or achieving a goal • Social - Consumer wants, learning, motives and etc are influenced by opinion leaders, person’s family, reference groups, social class and culture UNIT 4: MARKET STRUCTURE Chapter objectives • Describe and understand the market general concept and its structures • Identify and explore the competitive market: monopoly, oligopoly, and perfect competition • Discuss the definition and explanation on entrepreneurship and joint-venturesMarketA market is one of many varieties of systems, institutions, procedures, social relations andinfrastructures whereby parties engage in exchange. While parties may exchange goods andservices by barter, most markets rely on sellers offering their goods or services (including labor) inexchange for money from buyers. It can be said that a market is the process in which the prices ofgoods and services are established. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  24. 24. Introduction to Tourism EconomicsIn mainstream economics, the concept of a market is any structure that allows buyers and sellers toexchange any type of goods, services and information. The exchange of goods or services formoney is a transaction. Market participants consist of all the buyers and sellers of a good whoinfluence its price.Markets vary in form, scale (volume and geographic reach), location, and types of participants, aswell as the types of goods and services traded. Examples include: • Physical retail markets, such as local farmers markets (which are usually held in town squares or parking lots on an ongoing or occasional basis), shopping centers and shopping malls • (Non-physical) internet markets (see electronic commerce) • Ad hoc auction markets • Markets for intermediate goods used in production of other goods and services • Labor markets • International currency and commodity markets • Stock markets, for the exchange of shares in corporations • Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits (see carbon trading) • Illegal markets such as the market for illicit drugs, arms or pirated productsThere are two roles in markets, buyers and sellers. The market facilitates trade and enables thedistribution and allocation of resources in a society. Markets allow any tradable item to be evaluatedand priced. A market emerges more or less spontaneously or is constructed deliberately by humaninteraction in order to enable the exchange of rights (cf. ownership) of services and goods.Historically, markets originated in physical marketplaces which would often develop into — orfrom — small communities, towns and citiesMarket structureMarket structure is best defined as the organisational and other characteristics of a market.Traditionally, the most important features of market structure are: • The number of firms (including the scale and extent of foreign competition) • The market share of the largest firms (measured by the concentration ratio – see below) • The nature of costs (including the potential for firms to exploit economies of scale and also the presence of sunk costs which affects market contestability in the long term) • The degree to which the industry is vertically integrated - vertical integration explains the process by which different stages in production and distribution of a product are under the ownership and control of a single enterprise. A good example of vertical integration is the oil industry, where the major oil companies own the rights to extract from oilfields, they run a fleet of tankers, operate refineries and have control of sales at their own filling stations. • The extent of product differentiation (which affects cross-price elasticity of demand) • The structure of buyers in the industry (including the possibility of monopsony power) • The turnover of customers (sometimes known as “market churn”) – i.e. how many customers are prepared to switch their supplier over a given time period when market ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  25. 25. Introduction to Tourism Economics conditions change. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketingIn economics, market structure (also known as the number of firms producing identical products). • Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products. • Oligopoly, in which a market is dominated by a small number of firms that together control the majority of the market share. • Duopoly, a special case of an oligopoly with two firms. • Oligopsony, a market where many sellers can be present but meet only a few buyers. • Monopoly, where there is only one provider of a product or service. • Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. • Monopsony, when there is only one buyer in a market. • Perfect competition is a theoretical market structure that features unlimited contestability (or no barriers to entry), an unlimited number of producers and consumers, and a perfectly elastic demand curve.Competitive marketMonopolistic competition is a type of imperfect competition such that competing producers sellproducts that are differentiated from one another as good but not perfect substitutes (such as frombranding, quality, or location).In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores theimpact of its own prices on the prices of other firms. In a monopolistically competitive market,firms can behave like monopolies in the short run, including by using market power to generateprofit. In the long run, however, other firms enter the market and the benefits of differentiationdecrease with competition; the market becomes more like a perfectly competitive one where firmscannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred,monopolistic competition can fall into natural monopoly, even in the complete absence ofgovernment intervention.Monopolistically competitive markets have the following characteristics: • There are many producers and many consumers in the market, and no business has total control over the market price. • Consumers perceive that there are non-price differences among the competitors products. • There are few barriers to entry and exit. • Producers have a degree of control over price.There are six characteristics of monopolistic competition (MC): • Product differentiation • Many firms • Free entry and exit in the long run • Independent decision making • Market Power ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  26. 26. Introduction to Tourism Economics • Buyers and Sellers do not have perfect information (Imperfect Information)Market powerMC firms have some degree of market power. Market power means that the firm has control overthe terms and conditions of exchange. An MC firm can raise it prices without losing all itscustomers. The firm can also lower prices without triggering a potentially ruinous price war withcompetitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MCfirm has market power because it has relatively few competitors, those competitors do not engage instrategic decision making and the firms sells differentiated product. Market power also means thatan MC firm faces a downward sloping demand curve - The demand curve is highly elastic althoughnot "flat"MonopolyA monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell) exists when aspecific person or enterprise is the only supplier of a particular commodity. Monopolies are thuscharacterized by a lack of economic competition to produce the good or service and a lack of viablesubstitute goods. The verb "monopolise" refers to the process by which a company gains muchgreater market share than what is expected with perfect competition.A monopoly is distinguished from a monopsony, in which there is only one buyer of a product orservice ; a monopoly may also have monopsony control of a sector of a market. Likewise, amonopoly should be distinguished from a cartel (a form of oligopoly), in which several providersact together to coordinate services, prices or sale of goods. When not coerced legally to dootherwise, monopolies typically maximize their profit by producing fewer goods and selling them athigher prices than would be the case for perfect competition.Sometimes governments decide legally that a given company is a monopoly that doesnt serve thebest interests of the market and/or consumers. Governments may force such companies to divideinto smaller independent corporations as was the case of United States v. AT&T, or alter itsbehavior as was the case of United States v. Microsoft, to protect consumers. Monopolies can beestablished by a government, form naturally, or form by mergers.A monopoly is said to be coercive when the monopoly actively prohibits competitors by usingpractices (such as underselling) which derive from its market or political influence. There is oftendebate of whether market restrictions are in the best long-term interest of present and futureconsumers.Characteristics • Profit Maximiser: Maximizes profits. • Price Maker: Decides the price of the good or product to be sold. • High Barriers to Entry: Other sellers are unable to enter the market of the monopoly. • Single seller: In a monopoly there is one seller of the good which produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. • Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  27. 27. Introduction to Tourism EconomicsSources of monopoly powerMonopolies derive their market power from barriers to entry – circumstances that prevent or greatlyimpede a potential competitors ability to compete in a market.There are three major types of barriers to entry; economic, legal and deliberate. • Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority. o Economies of scale: Monopolies are characterised by decreasing costs for a relatively large range of production. Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. o Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry o Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology o No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. o Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good. o Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. • Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good. • Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and forceOligopolyAn oligopoly is a market form in which a market or industry is dominated by a small number ofsellers (oligopolists). The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι(oligoi) "few" + πωλεῖν (polein) "to sell". Because there are few sellers, each oligopolist is likely tobe aware of the actions of the others. The decisions of one firm influence, and are influenced by, thedecisions of other firms.Strategic planning by oligopolists needs to take into account the likely responses of the other marketparticipants. Oligopolistic competition can give rise to a wide range of different outcomes - In somesituations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raiseprices and restrict production in much the same way as a monopoly.Where there is a formal agreement for such collusion, this is known as a cartel - A primary exampleof such a cartel is OPEC which has a profound influence on the international price of oil. Firms ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  28. 28. Introduction to Tourism Economicsoften collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in thesemarkets for investment and product development.There are legal restrictions on such collusion in most countries. There does not have to be a formalagreement for collusion to take place (although for the act to be illegal there must be actualcommunication between companies)–for example, in some industries there may be anacknowledged market leader which informally sets prices to which other producers respond, knownas price leadership.In other situations, competition between sellers in an oligopoly can be fierce, with relatively lowprices and high production. This could lead to an efficient outcome approaching perfectcompetition.The competition in an oligopoly can be greater than when there are more firms in an industry if, forexample, the firms were only regionally based and did not compete directly with each other.Characteristics • Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs. • Ability to set price: Oligopolies are price setters rather than price takers. • Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. • Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms. • Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. • Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). • Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality. • Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firms market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firms countermoves.Perfect CompetitionIn economic theory, perfect competition describes markets such that no participants are largeenough to have the market power to set the price of a homogeneous product. Because the conditionsfor perfect competition are strict, there are few if any perfectly competitive markets. Still, buyersand sellers in some auction-type markets, say for commodities or some financial assets, mayapproximate the concept.Perfect competition serves as a benchmark against which to measure real-life and imperfectlycompetitive markets. Generally, a perfectly competitive market exists when every participant is a"price taker", and no participant influences the price of the product it buys or sells. ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  29. 29. Introduction to Tourism EconomicsSpecific characteristics may include: • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. • Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. • Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. • Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). • Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. • Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry.In the short term, perfectly-competitive markets are not productively efficient as output will notoccur where marginal cost is equal to average cost, but allocatively efficient, as output will alwaysoccur where marginal cost is equal to marginal revenue, and therefore where marginal cost equalsaverage revenue. In the long term, such markets are both allocatively and productively efficient.Under perfect competition, any profit-maximizing producer faces a market price equal to itsmarginal cost.This implies that a factors price equals the factors marginal revenue product. This allows forderivation of the supply curve on which the neoclassical approach is based. (This is also the reasonwhy "a monopoly does not have a supply curve.") The abandonment of price taking createsconsiderable difficulties to the demonstration of existence of a general equilibrium except underother, very specific conditions such as that of monopolistic competition.EntrepreneurshipEntrepreneurship is the act of being an entrepreneur, which can be defined as "one whoundertakes innovations, finance and business acumen in an effort to transform innovations intoeconomic goods".This may result in new organizations or may be part of revitalizing mature organizations inresponse to a perceived opportunity. The most obvious form of entrepreneurship is that of startingnew businesses (referred as Startup Company); however, in recent years, the term has beenextended to include social and political forms of entrepreneurial activity.When entrepreneurship is describing activities within a firm or large organization it is referred to asintra-preneurship and may include corporate venturing, when large entities spin-off organizations . ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  30. 30. Introduction to Tourism EconomicsEntrepreneurial activities are substantially different depending on the type of organization andcreativity involved. Entrepreneurship ranges in scale from solo projects (even involving theentrepreneur only part-time) to major undertakings creating many job opportunities.Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) inorder to raise capital to build the business. Angel investors generally seek annualized returns of 20-30% and more, as well as extensive involvement in the business. Many kinds of organizations nowexist to support would-be entrepreneurs including specialized government agencies, businessincubators, science parks, and some NGOs.Joint-venturesA joint venture (JV) is a business agreement in which parties agree to develop, for a finite time, anew entity and new assets by contributing equity. They exercise control over the enterprise andconsequently share revenues, expenses and assets. There are other types of companies such as JVlimited by guarantee, joint ventures limited by guarantee with partners holding shares.With individuals, when two or more persons come together to form a temporary partnership forthe purpose of carrying out a particular project, such partnership can also be called a joint venturewhere the parties are "co-venturers". The venture can be for one specific project only - when the JVis referred to more correctly as a consortium (as the building of the Channel Tunnel) - or acontinuing business relationship. The consortium JV (also known as a cooperative agreement) isformed where one party seeks technological expertise or technical servicearrangements, franchise and brand use agreements, management contracts, rental agreements, forone-time contracts. The JV is dissolved when that goal is reached.A joint venture takes place when two parties come together to take on one project. In a jointventure, both parties are equally invested in the project in terms of money, time, and effort to buildon the original concept. While joint ventures are generally small projects, major corporations alsouse this method in order to diversify. A joint venture can ensure the success of smaller projects forthose that are just starting in the business world or for established corporations. Since the cost ofstarting new projects is generally high, a joint venture allows both parties to share the burden of theproject, as well as the resulting profits.Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short,both parties must be committed to focusing on the future of the partnership, rather than just theimmediate returns. Ultimately, short term and long term successes are both important. In order toachieve this success, honesty, integrity, and communication within the joint venture are necessary.Partner selectionWhile the following offers some insight to the process of joining up with a committed partner toform a JV, it is often difficult to determine whether the commitments come from a known anddistinguishable party or an intermediary. This is particularly so when the language barrier exists andone is unfamiliar with local customs, especially in approaches to government, often the decidingbody for the formation of a JV or dispute settlement.The ideal process of selecting a JV partner emerges from: • screening of prospective partners • short listing a set of prospective partners and some sort of ranking • due diligence – checking the credentials of the other party • availability of appreciated or depreciated property contributed to the joint venture ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.
  31. 31. Introduction to Tourism Economics • the most appropriate structure and invitation/bid • foreign investor buying an interest in a local companyCompanies are also called JVs in cases where there are dominant partners together withparticipation of the public. There may also be cases where the public shareholding is substantial butthe founding partners retain their identity. These companies may be public or private companies.Further consideration relates to starting a new legal entity ground up. Such an enterprise issometimes called an incorporated JV, one packaged with technology contracts (knowhow, patents,trademarks and copyright), technical services and assisted-supply arrangements.The consortium JV (also known as a cooperative agreement) is formed where one party seekstechnological expertise or technical service arrangements, franchise and brand use agreements,management contracts, rental agreements, for one-time contracts, e.g., for construction projects.They dissolve the JV when that goal is reached.Company incorporationA JV can be brought about in the following major ways: • Foreign investor buying an interest in a local company • Local firm acquiring an interest in an existing foreign firm • Both the foreign and local entrepreneurs jointly forming a new enterprise • Together with public capital and/or bank debt UNIT 5: THE THEORY OF PRICE DETERMINATION Chapter objectives • Outline the definition of pricing and understand about price sensitivity • Identify and explain the different types of pricing strategies • Discuss about the different types of pricing methods and price discounting measurements • Explore the demand and supply model: demand and supply curve, as well as demand and supply price elasticity ©2012 World-Point Academy of Tourism Sdn. Bhd. All Rights Reserved.