Supply and demand in tourism

Supply and Demand in Tourism

Demand:

Demand refers to how much (quantity) of a product or service is desired by buyers.

The quantity demanded is the amount of a product people are willing to buy at a certain price.

The relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer.

The quantity supplied refers to the amount of certain goods producers are willing to supply when receiving a certain price.

The correlation between price and how much of goods or service is supplied to the market is known as the supply relationship.

Price, therefore, is a reflection of supply and demand.

The Supply Relationship

Law of Demand 1

The Law of Demand states that other things held constant, as the price of a

good or service increases, the quantity demanded will fall.

The four basic laws of supply and demand:

1. If demand increases and supply remains unchanged, a shortage will result, leading to a higher equilibrium price.

2. If demand decreases and supply remains unchanged, a surplus will result, thus leads to a lower equilibrium price.

3. If demand remains unchanged and supply increases, a surplus will result, leading to a lower equilibrium price.

4. If demand remains unchanged and supply decreases, a shortage will result, leading to a higher equilibrium price.

Equilibrium Price

The market price at which the supply of an item equals the

quantity demanded.

Law of Supply and Demand

In free markets, surpluses and/or shortages tend to be temporary and obey the law of supply and demand, since actions of buyers and sellers tend to match prices back toward

their equilibrium levels.

Definition of Demand

The amount of a product that will be sold at a certain price for a

specified period

ie the higher the price the less bought….the lower the price the

more purchased

Definition of ‘demand for tourism’:

The total number of persons who travel or wish to travel and use tourist facilities and services at places away from their places of work or residence

(Cooper et all. 1993)

Demand for Tourism

Development at a tourism destination is shaped by the demand for tourism in that country. Thus the demand for tourism in any country is shaped by the tourism opportunities.

Tourism opportunities represent a mix of attractions.

For a destination to succeed it is important to deliver a quality product based on sustainable principles necessary for tourism development.

External factors that influence tourism demand

External factors –eg disposable income, time availability, change in the demographic composition of a society.

Basic services intertwined with tourists motivations – eg availability of the right kind of accommodation, reliable and available transport, infrastructure

Market segments –the categorization of tourists Tourism policy by government organisations Marketing through promotional campaigns that lift

or create demand (eg Tourism NZ Hobbit campaign) The media through either positively endorsing or

recommending a destination or tourism supplier, or adversely reporting on negative aspects of tourism in an area.

Motivation and Demand:

Travel facilitators are economic and social factors combined with influence from suppliers of tourism products. Facilitators relate to a person’s ability to travel. Key facilitators are: time and money.

Motivators relate to the reasons why people wish to travel and engage in tourism.

Maslow’s Hierarchy of Needs

Cuebro Ramumbo:

Physical motivators Cultural motivators Interpersonl motivators Status and prestige motivators

Professor H.P.Gray:

Wanderlust – the desire to exchange the known for the unknown, to leave familiar things and to seek new experiences, places, people and cultures

Sunlust – a desire to travel and enjoy sunny places

Characteristics of Tourism Demand:

Elasticity

Supply of some tourism facilities (eg accommodation) is ‘inelastic’….ie limited or restricted.

When supply is limited competing forces may bid the price up.

In response to higher offers suppliers may be willing to increase production (extend the hotel, release additional rooms).

Price Elasticity

If the %age change in demand is greater than the %age change in price which caused it, then demand is elastic.

If the change in demand is less than the %age change in price which caused it, then demand is inelastic.

If responsiveness of demand is exactly proportional to the change in price, then elasticity is unitary.

Price elasticity of demand in New Zealand

1. Price of transport to the destination2. Rate of exchange between the currency of

the host country and the currency of the generating country (international tourism)

3. The price of ground costs (as influenced by inflation)

Price of tourism product is made up of 3 components:

Income Elasticity

An individuals income increases their demand for specific products but reduce their demand for products previously consumed.

This is because the change in income may allow a person to buy a higher-quality product instead of an inferior product. [Law of Substitution]

Air fares elasticity

Short haul air fares tend to be inelastic as price elasticity of demand has been calculated to be inelastic. (doesn’t change demand much

Long haul travel tends to be price elastic (ie a special air fare reducing $300 of the price of a flight to NZ can create an immediate increase in demand) whereas low priced are usually price inelastic (ie reducing the cost of a Diet Coke from $1.20 to $1.15 is unlikely to cause much shift in demand)

Exchange rate elasticity

A drop in the value of the NZ$ is positive for NZ tourism as it lowers the cost of visiting the country. Visitor numbers and spending will increase. But the funding that Tourism NZ receives for marketing NZ overseas is in NZ$, and as the value of the dollar decreases their purchasing power overseas will also decrease.

A strong NZ$ increases the cost of an NZ holiday and reduces the spending power of visitors, It does however increase the purchasing power of TNZ offshore by increasing its marketing budget in overseas markets.

Determinants of demand elasticity

For business travellers the decision of when/where or even whether to go is often beyond their control. (attending conferences, meetings, product launches etc) So business travel is both price and income inelastic.

For leisure travellers they have freedom of choice regarding where/when/how long and even whether to go on holiday at all. Leisure travellers can shop competitively, checking prices, value for money, special offers etc. So income and price elasticities are higher than for business travellers.

Total revenue and elasticity of demand

Drop in price only increases revenue if demand is high enough and the quantity sold compensates for lowering of selling price.

Increase in price usually leads to drop in demand but can lead to increase in overall revenue.

Sensitivity of demand

Fashion – destinations go in and out of fashion

Socio-political changes – civil unrest can seriously affect demand for a destination, or alternatively increase demand if the country was previously engaged in war or internal strife and is now peaceful.

Simultaneous consumption of complementary products and services

Tourism products are often consumed together, such as an air flight and a hotel room along with a sightseeing tour.

So increase in demand for one product may cause increase in demand of completementary product.

Competition

From other tourism products, such as suppliers of similar products, or suppliers of products to other destinations.

From non tourism products – because expenditure on tourism is often discretionary and could be reassigned to other ‘luxury’ goods such as computer, car, home theatre system.

Seasonality

Tourism demand is highly season almost worldwide with weather being critical factor in choosing a destination

School holidays affect seasonality, as do traditional ‘factory shut-downs’ that require workforce to take holidays at that time.

Key holidays affect seasonality, such as Christmas, Thanksgiving in USA.

Special events are impacted by seasonality of demand…the tourism demand is only present for the periods of the event.

Marketing strategies are designed to shift demand from peak (requires less marketing effort) to off-peak in order to extend the tourism season

Law of Supply

As the price of a product rises, all other things being equal , suppliers will offer more for sale. [As they will

have more to sell since price increases can dampen demand]

Definition of tourism supply

The supply of all assets, services and goods to be enjoyed or bought by visitors and occasioned by the journeys of visitors.

Tourism supply consists of an amalgamation or mix of attractions. Tourism supply shapes

the demand for tourism in a country.

[Cooper et al – 1993]

Tourism Supply:

Supply – the provision of the key elements of the tourism industry by the host government and destinational leadership.

Tourism resources for tourism supply range from natural to man-made.

Infrastructure required includes telecommunications, accommodation and transport.

Tourism services include tour companies, visitor information offices, transport rental agencies

Understanding tourism supply

'Tourism supply is a complex phenomenon because of both the nature of the product and the process of delivery.

Principally, it cannot be stored (i.e. it is a perishable product), it is intangible in that it cannot be examined prior to purchase, it is necessary to travel to consume it, heavy reliance is placed on both natural and human-made resources and a number of components are required, which may be separately of jointly purchased and which are consumed in sequence.

It is a composite product involving transport, accommodation, catering, natural resources, entertainment, and other facilities and services, such as shops and banks, travel agents and tour operators.'

Sinclair and Stabler (1997:58)

Tourism destination planning

The availability of natural resources and attractions

The availability of investment funds A skilled human resource base Government policy that supports tourism Destination accessibility The presence of complementary services

and facilities and infrastructure

Tourism exists in a fixed geographical location:

Visitors must visit the destination or location. The location cannot relocate to the visitor!

Businesses have to invest in tourism operations at the destination with an expectation that the destination will appeal sufficiently to visitors.

This characteristic of tourism supply impacts on a destinations’ ability to grow to meet demand. (investors can be slow to see the opportunity but quick to see the risk)

Tourism Product

TransportTourists Area of Origin

Tourists Destination

Tourists DemandProduct Package Supplier

Associated Services

Government NGOsTourism

OperatorsServices Tour Guides

+ Drivers

ACCOMMODATION

Components of Tourism Supply (supply chain)

(Tshililo Nelwamondo – 2009)

Tourism Suppliers

Hospitality – accommodation, food service, entertainment, leisure activities

Transport: Air, road, rail – both to the destination and travelling around

Attractions: Theme parks, museums, buildings, ski-slopes etc

How does supply change to meet demand?

Changes airlines have made to meet demand with changing routes (cancelling some, introducing others, adding or deleting capacity to meet the market)

Construction of new 4 and 5 star hotels in Auckland to meet demand for higher quality accommodations

Cruise ships – flood of new ships being built (additional supply) to meet the growing demand for cruising.

Advent of high-end luxury cruising with balconies/windows and incredible array of amenities to suit demand by more discerning consumers.

Expansion of conference facilities (Sky City etc) to meet growth in conferences and events market.

Time and Supply

Time is important to supply because suppliers must try to react quickly to a

change in demand or price. For suppliers it’s important to determine whether a

price change that is caused by demand will be temporary or permanent.

Changes in quantity of a product or service occur due to:

Capacity and technology Cost structure Prices of substitutes and complements Perceptions of future prices Income Preferences

Demand and Supply in Pricing

If no single seller or buyer can set prices and neither does government or any other institution; how are goods and services allocated in competitive markets, and how are resources allocated in the competitive factor markets?

If markets were not competitive by definition a single seller or buyer could control and set price. Competition then needs flexible impersonal pricing.

Suppliers must not work together to influence prices, and each supplier must be able to enter or exit a market at will.