1.a. Demand for Uber after severe storms Increases while its supply decreases as drivers are unwilling to “get onto storm-ravaged roads and squeeze through traffic”. Assuming that the market is perfectly competitive, if Uber were to charge the same price per kilometer traveled irrespective of the circumstances then this would violate a rule of perfect markets were the prices supposed to be flexible. Sellers and buyers are price takers and forces of demand and supply determine the price.
A fixed price during periods after severe storms doesn’t prevent a shift in the demand curve to the right from D1 to D2 that ought to increase the price from P1 to P2. However, in our case the price remains fixed at P1 leading to a disequilibrium.
b. Surge pricing corrects the market and returns it to equilibrium. During busy times and after storms, most Uber drivers may not wish to operate due to the congestion in the city and may prefer to sit it out. This leads to a decrease in supply while the demand remains the same or increases. To solve this glut, Uber drivers have to be given an incentive to literally “weather the storm” by increasing their compensations. The demand shifts to D2 from D1to represent the new market equilibrium point with the new curve D2.
c. Surge pricing corrects market imperfections of either excess demand or supply. In our case it corrects a decrease in supply which results in excess demand. For those who would have gotten an Uber ride without surge pricing, the increase in price means they are worse off although the increased supply results in shorter waiting time for the taxi Uber. For the group of commuters who can only get an Uber ride after the surge pricing, the measure is positive and means they are better off. Overall, both sets of commuters can access the service due to the measure and are therefore better off.
As can be shown, surge pricing reduces the incident of excess demand and maintains equilibrium.
2. a. Demand for land in the cities continues to rise/increase over time. However, the supply of the commodity (land) is fixed and actually decreases as more structures are put up.
b. The demand for land in urban conurbations has increased in recent times while the supply of the same is fixed. The demand curve has shifted to the right from D1 to D to lead to a corresponding increase in the price of land from P1 to P while the supply curve is fixed as land cannot be reproduced or increased as shown below.
c. Increase in taxes usually results in reduced supply as the cost of production is increased. However, land, unlike other commodities does not change its supply as it is fixed and therefore a decrease or increase in it is not possible.
As is shown in the diagram above, for normal goods, the price the consumers pay increases to Pc while the cost of production is Pp. the resulting difference is the tax. Land tax has the same effect on its price although it does not decrease its supply as portrayed in the diagram on 2 b).
3.a. In the long-run the hawker business can be termed as being perfectly competitive where the marginal cost as shown in the diagram is equal to the price. The price is also equal to the average cost. In case the price is greater than the average cost, firms will be making abnormal profits thus other firms enter the market until equilibrium is achieved. The reverse is true. A price below the average cost makes many firms leave the market up until the price matches the average cost.
b. In the Short-run subsidies by the government decrease the cost of production resulting in a decrease in prices. On the supply and demand curve, subsidies result in a rightward shift of the supply curve as shown below. Price drops to Ps while the quantity supplied increases due to the decreased costs of producing leading to an oversupply of Hawker business in the long-run. Therefore, over the long run, the profits gained by the hawkers will drop to normal (mirror the rest of the market)
Tourism Industry in Australia
The Australian tourism industry is a vital component in the overall economy of the country contributing 3.4% to the total GDP output which stood at A$54.5 billion for the financial year 2016/2018 (RBA, 2015). International tourism contributes 29% of the total direct tourism industry with a total of 7.9 million visitors arriving in the year 2017 alone. Close to 600,000 people are employed in the industry with more than half being directly employed. The industry is broad-based and mostly encompasses beaches, famous structures like the opera house, the Great Barrier Reef and the parts of the service industry. The industry has so far been experiencing a boom with growth rates of 6% in the recent years (The Conversation, 2017). This research paper will delve into issues that affect the industry’s profitability as well as study its market dynamics.
Market segmentation generally refers to how a particular industry is structured through the interaction of buyers and sellers (RBA, 2015). The structure has a bearing on profitability and determines whether the firm can set its price independently or if it has to consider others.
The market within the industry is mostly structured as perfect competition in large segments of the market. Players within the industry are by and large price takers mostly shaped by seasons in the market which range from high to low. Barriers to the industry are minimal and any player can enter or leave the market very easily (Bouman, 2013). However, the market is segmented to cater for the different types of tourists. Portions of the market like cruising ships have very high barriers of entry with the high costs associated with purchasing a vessel. The same goes for five-star facilities that dot some of the countries coastal beaches.
The figure below attempts to explain a firm’s profitability under a perfect competition market. The market price which is pre-determined by market forces is the point P1 and at E1 the firm is a price taker which implies a straight demand curve (Bouman, 2013). Point X denotes the optimum profit position. Therefore, the area shown by P1, X, Y, AC represents the optimum profit area of the firm which attracts others into the industry as there are no barriers to entry. Increased number of firms shifts the supply curve rightwards leading to a decrease in prices while keeping the demand constant. The process of entry is continual as long as the profits are above bar until P is achieved.
However, despite the market structure being perfect competition, brand loyalty sustains brand names that tourists are used to and have taken to them. Overtime, to overcome some of the issues that come with perfect markets like minimal profits, most players in the industry have come up with policies that differentiate them and further segment the market (Dubner, 2011). One of them is service ratings, where service providers are rated and given a score. The worldwide accepted score guidelines for hotels within the industry is a star scoring with five-star hotels being the most luxurious and have the best services (TTF, 2015). The other industry policy is reviewing which not only creates a loyal brand but also fosters reputation. Tourists leave behind their reviews and accord ratings to hotels of their stay or other tourist destinations on websites. Through reviewing, a barrier is created as entrants do not have the numbers to attract traffic and searches have them ranked very lowly (Appolo, 2014).
Another effect of both policies is product differentiation where higher ranked tourism service providers can tailor their offering to reflect whatever ranking as they so wish (RBA, 2015). Industry players also actively engage in differentiating their services to the different tourists that visit the country. One major key importance of product differentiation is, reducing the effects of seasonality and prolonging the tourism period to cover as much of the year as possible (TTF, 2015). Product differentiation also allows for pricing that is different from competition as products offered by competition are viewed by tourists as not being the same.
Price discrimination practiced widely in the industry has ensured increased profits. Price discrimination is a practice where different individuals are charged differently for the same product (Bouman, 2013). Within the Australian tourism industry, it is widely practiced more so group pricing. Industry players divide the market into different segments and then charge each section a different price (Dubner, 2011). Foreigners are charged higher fees for access to the same facilities as locals as the perception of them being richer than locals persists (TRA, 2014).
In another example an airline may charge $300 for a seat that would on average cost $150 but places the requirement of a return ticket on the cheaper alternative. Hotels also discount revelers depending on the time of booking, tourists booking in advance will on average get better deals as compared to those who don’t (Apollo, 2014). Price discrimination also occurs when a player in the industry wants to boosts sales in a given group for example students and therefore offers them discounts (Dubner, 2011). They may also include members of certain professionals with the aim of fostering customer loyalty alongside improving the public perception of the business (customer relations).
The emergence of technology has had a myriad of effects on the tourism industry. More than ever before, technology reaches much of the world’s population. It has led to increased competition as competing alternatives have sprung up overnight mostly internet based companies that act as middlemen or have a full-service offering that deviates from the industry’s standards. A good example of such a firm that has disrupted the hotel business within the industry is BNB (Bed and breakfast). The firm operates as a virtual online middleman in the same way the taxi company Uber does (Inn keeping, 2015).
It does not own or control any tourist destinations or hotel beds and lodgings but rather employs a very subtle business model of simply providing the platform for which previously locked out players can gain entrance and become active participants in the industry (Inn keeping, 2015). Such innovations whereas leading to the overall growth of the industry can spell doom to established players. Travelers who in the past would check in to hotels can now get a cheaper alternative as the site connects them to private individuals looking to rent their unused spaces. The effects can however be mitigated by measures such as product differentiation discussed in this paper (TTF, 2015).
On the other hand, the application of technology has enabled the sector to reach out to a wider pool across the world through social media advertising as well as other electronic means of communication (TRA, 2014a). These methods have proved to be cheaper per capita as compared to the older forms of advertisements such as radio and print. Application of modern room booking and payment methods has improved profitability in the industry in addition to cutting costs.
Government policies do actively affect the profit margins within the industry. The Australian government is actively involved in the promotion, regulation and policing of the industry in the country (ABS, 2014). A 2020 vision was set up to harmonize the different actions of the government and merge policies. The plan has received backing by all provincial governments as well as industry players with the main objective of revitalizing the industry’s fortunes (TTNQ, 2013).
The policy document set lofty ambitions of increasing annual overnight visitor expenditure from $70 billion up to $115- $140 billion (RBA, 2015). The government policies include subsidizing the marketing demands of the industry abroad as well as locally. The provision of destination marketing internationally and funding of activities that advertise the nation’s tourism destinations drastically improve the profits of industry players (TTNQ, 2013). Firstly, they save on advertising money and can therefore redirect the extra cash in improving their experience offerings (RBA, 2015).
Secondly, increased numbers of tourists both local and international means increased revenue inflows and profitability. A dedicated tourism agency encompassing players within the industry was constituted to drive the marketing policies of the industry (Prideux, 2013). The government also committed to the funding of international events to be held in the country that includes cultural, diplomatic, sporting as well as business functions. In the financial year 2013- 2014, more than $700 million was committed to these endeavors with the government accounting for over ninety percent of the outlay.
A tourism Australia report showed that there was a skill gap in all areas of the tourism industry. The jobs with the most shortage included airline pilots, tour guides, and computer programmers (TRA, 2014a). The report further indicated that the problem would balloon out to over 120,000 if there were a lack of policy implementation to address it early enough. The government sought to intervene and has relaxed visa restrictions on foreign workers to work in the industry. Also, the government has pledged to increase funding for the upgrading of hospitality and tourism training at all levels.
Moreover, agencies within the government compile analysis about the industry that includes researches to guide prospective visitors to the country (ABS, 2014). The agencies include the Australian Bureau of Statistics, Tourism Australia and Tourism Research Australia (TRA, 2014b). Government investment in infrastructure contributes to the industry’s profits as key ways leading to sites are opened up for easy access.
Unplanned, over- expenditure or uncoordinated investment by the government can have at times negative impacts on the industry the government intends to boost (Bouman, 2013). The stated laxities can lead to market failure occasioned by negative externalities where government policy expenditure has negative effects on parties that are not within the industry. Over expenditures on public goods that are both non-rivalrous as well as non-excludable can also lead to market failure.
Additionally, aggressive government initiatives may crowd out private equity which starves self-initiative while suppressing the industry’s vigor more so when a free-rider issue exists (Bouman, 2013).
The current upsurge within the tourism industry is down to close cooperation between industry players and government policymakers. Continued collaboration between the two players will only lead to better days for the industry. The importance of emerging markets like China cannot be overstated. Going forward, it will be important to continue the focus on emerging markets without completely shifting attention away from our traditional partners like the United States.
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Tourism Australia, (2020): New Research to help Australian Tourism Reach its Potential. Australian Government, Canberra
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