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Question:

Using demand and supply fundamentals, explain why prices in school holidays are often higher than in school terms?
 
 

Answer:

Demand And Supply Of Tourism

Tourism industry is not only signified as the pleasure industry offering leisure, refreshment and enjoyment but it also plays an economic role. (Biggs, 2010)

Economic Factors Considered For Price Setting

The economic factors that determines the price of the tour package depends on the consumer preference regarding the choice of destination, travel season, mode of transport, food options while the travel and other expenses involved in exploring the destination. (https://www.destinationnsw.com.au, 2015) This involves the cost of the arrangements which derives the price of tour packages. Another important factor is the price charged by the competitor which alters the pricing strategy of the tour operators. They would try to lower the price than the rival operator in order to gain the market share. (Kozak, Gnoth and Andreu, 2010) (Spilsbury, 2011)

Price Rise In School Holidays (By Demand And Supply Analysis)

The fundamental concept of economics is the determination of equilibrium price and quantity based on the market demand and supply. Based on the question provided we frame a demand and supply mechanism where tour package is the good and price of the product is the price of the tour packages. (Hall, 2010)

There is a negative relationship between the price of the tour package and the demand for tour packages so the demand curve for the tour packages is downward sloping. (Matias, Nijkamp and Sarmento, 2013)

 

Now the supply of the tour package has a positive relationship with its price. Thus the supply curve of the tour package is a upward sloping. . (Anon, 2015)

The intersection of the supply and demand curve yields the equilibrium price and quantity of the tour package. The following diagram shows the fundamentals of the demand and supply of the tour packages. (Turaev, 2010)

We consider that during the school holidays, the price of the tour packages tend to increase compared to the time period when the schools are open. (Yong, 2014)This can be explained from the fact that during vacations, the children get free time which they want to utilize by visiting places for fun and recreation. Now the suppliers of the tour packages are aware of the phenomenon that the children and their parents would be interested to go out on vacations only when the schools of their children have declared holidays. With this fact, the tour operators know that the demand for tour package will increase in this time. This would create a situation of excess demand and drive up the price of the tour packages. . (https://www.tourism.umn.edu, 2012)

The above diagram shows that during the school holidays, the demand for tour packages increases which is depicted by the shift of the demand curve from D to D1. Then there arises an excess demand in the market which drives up the price from P* to P1. Thereby the quantity of tour packages also increased from Q* to Q1. (Vanhove, 2011)

Risk Factors In Pricing

The pricing strategy of the international tourism depends on several risk factors. The fluctuation in the exchange rate is one such risk factor that alters the decision of the tourist. If the exchange rate variation is unfavorable then the tourist would decrease their visits to abroad as the foreign currency had become expensive. The tourist can completely change the destination of travel from international to national places, cut down his expenses and decrease the number days of his stay, and also change the mode of travel and even can decide to travel in another season. All these would lead to a decline in the demand resulting in a situation of excess supply. The tour operators would lower the price to maintain market stability. (De Vita, 2014)

When the exchange rate changes in favor of the tourists then the opposite happens. Now as the foreign currency has become cheaper, the tourist can make frequent visit to abroad and make purchases of international tour package, can buy additional goods and services, stay longer in a particular foreign destination and can even avail the expensive mode of transport. All these will augment the demand for tour packages and create a situation of excess demand. Capturing this market condition the tour operators will increase the price of tour packages. (De Vita and Kyaw, 2013)

Another risk factor that needs mention is the rate of inflation at the tourist destination. If there is substantial inflation in the tourist spot, then all goods and services would be costly there which would discourage the tourists to visit those places. This would decline the demand for tour packages and drive down the price. (Agarwal, 2008).

Thus, the tour operators consider all risk factors that affect the demand and supply of the tourism industry for pricing strategy.

 

References

Agarwal, S. (2008). Now, inflation storm hits tourism industry. The Financial Express. [online] Available at: https://archive.financialexpress.com/news/Now-inflation-storm-hits-tourism-industry/347503/1 [Accessed 13 Feb. 2015].

Anon, (2015). [online] Available at: https://www.iba.gov.au/wp-content/uploads/2013/03/20130304ResearchReport_Demand-and-Supply-Issues-in-Indigenous-Tourism-A-Gap-Analysis.pdf [Accessed 13 Feb. 2015].

De Vita, G. (2014). The long-run impact of exchange rate regimes on international tourism flows.Tourism Management, 45, pp.226-233.

De Vita, G. and Kyaw, K. (2013). ROLE OF THE EXCHANGE RATE IN TOURISM DEMAND.Annals of Tourism Research, 43, pp.624-627.

Hall, C. (2010). Crisis events in tourism: subjects of crisis in tourism. Current Issues in Tourism, 13(5), pp.401-417.

https://www.tourism.umn.edu, (2012). Do families vacation more in the summer when school starts after Labor Day?. [online] Available at: https://www.tourism.umn.edu/prod/groups/cfans/@pub/@cfans/@tourism/documents/asset/cfans_asset_402396.pdf [Accessed 13 Feb. 2015].

Matias, A., Nijkamp, P. and Sarmento, M. (2013). Quantitative methods in tourism economics. Heidelberg: Physica-Verlag.

Turaev, B. (2010). The impact of organizational and economic factors on tourism development.Perspectives of Innovations, Economics and Business, pp.77-79.

Vanhove, N. (2011). The economics of tourism destinations. [Place of publication not identified]: Elsevier.

Yong, E. (2014). Innovation, Tourism Demand and Inflation: Evidence from 14 European Countries.JOEBM, pp.191-195.

Biggs, D. (2010). The Tourism Society's Dictionary for the Tourism Industry. Tourism Management, 31(4), p.556.

https://www.destinationnsw.com.au, (2015). Pricing your tourism product. [online] Available at: https://www.destinationnsw.com.au/wp-content/uploads/archived-items/Tourism-Business-Toolkit-VOL2-Chapter3.pdf [Accessed 13 Feb. 2015].

Spilsbury, R. (2011). Tourism industry. New York: Rosen Central.

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