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Economic Concepts Related To Demand And Supply, Elasticity

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Question:

Discuss about the Economic Concepts Related to Demand and Supply, Elasticity.
 
 

Answer:

Introduction

The dynamics of any business is driven by the underlying demand and supply forces related to the underlying product or service offered by the business. These dynamics are critical to business decision making and also have a significant impact on the underlying profitability of the business activity. In this backdrop, an article has been selected which summarizes how a tragedy had adverse implications for the earnings of the firm and eventually led to the downfall in shares and company valuation. This aim of the given essay is to critically discuss the article using various economic concepts related to demand and supply, elasticity and externalities so as to highlight the event through the usage of economic theory.

Analysis  

For a theme park like Dreamworld, the target audience would be the youth especially children along with their parents and therefore the market for the theme parks would comprise of these individuals along with tourists who may come to visit such places. One of the key factors that influences the demand for these services as outlined in the selected article is the safety factor (Gal, 2014). As the theme parks tend to offer various rides and other sources of entertainment while attracting significantly large crowd, it is pivotal that necessary safety arrangements need to be made so as to prevent any mishaps. However, If such tragedy does occur as in the case of Dreamworld, then people would be reluctant to avail these services and hence demand curve would shift downwards as indicated below (Krugman.& Wells, 2008).

While the supply does not get altered, there is a decrease in the underlying demand which leads to a decrease in the equilibrium quantity from Q to Q1. Further, the price also experiences a downward pressure as indicated from P to P1 (Mankiw, 2014).

The impact of changes in demand and supply forces on the underlying price is reflected by the price elasticity of demand for the given product or service. In determination of the price elasticity, a host of factors need to be taken into consideration. These include the availability of substitutes, the nature of the product or service (necessity or luxury), contribution of the item to the monthly budget along with the product or service type (inferior or normal) (Mankiw & Taylor, 2011). The most relevant factor for the determination of price elasticity for theme park services is the nature of the service. It is apparent that service offered by theme park is not a necessity of life but rather a luxury which people can avoid for short to medium term without being affected. Besides, there are substitutes available to theme park by way of other modes of entertainment and places to visit which may be availed especially if there is a safety threat. As a result, it would be fair to conclude that the price elasticity for the given service would be elastic and hence the magnitude of elasticity would be greater than 1 (Arnold 2008). Also, the nature of the service would be normal as with increase in income levels, the demand would typically increase. In view of the elastic demand, it would be advisable that in order to maximize the revenue, the prices should not be increased. This is explained using the example below (Krugman & Wells, 2008).

 


Let us assume that entry price = $ 50

Current customer visits = 100,000

Existing Revenue = 50*100000 = $ 5,000,000

Assume that price elasticity = -2

Price increases to $ 60 which reflect a 20% increase in price.

Corresponding change in customer visits = 20*(-2) = -40%

Hence, customer visits at increased price = 100,000*(1-0.4) = 60,000

Revenue under increase price = 60000*60 = $ 3,600,000

It is evident from above that the prices should be kept lower in order to maximize the revenues.

A theme park of the size of DisneyWorld tends to have both positive and negative externalities. Externalities refer to the unintended effect of the business activities of a given player or industry which may be beneficial for the society or detrimental for the same. With regards to a theme park, the positive externality is on the local economy because of the immense tourism potential generated by these world class theme parks. Additionally, incremental employment opportunities would also be generated for the local population both directly and indirectly. Further, due to higher influx of tourists in such locations, there would be an increase in the foreign exchange earned. However, a negative externality is also attached in the form of higher influx of tourists which tends to put a strain on the available city infrastructure, leads to traffic congestion and thus has an adverse impact on the life of domestic people (Gal, 2014). In order to promote the positive externality, it is required that the government needs to actively promote the theme park especially amongst the tourists while providing incentives to the agents and companies providing services to tourists (Mankiw, 2014). Besides, in order to minimize the negative externality, a small fee may be levied on the tickets for the foreign tourists which would be diverted to the city administration in order to invest in periodic upgradation of the requisite infrastructure so as to minimize discomfort to the local people (Mankiw & Taylor, 2011).

Conclusion

Based on the above, it may be concluded that security issues tend to have an adverse impact on the demand and tends to cause reduction in customer flow. Further, on the basis of the nature of services offered, it is apparent that theme park would not be categorized in essential services and thus essentially would be luxury which would imply that their demand would be elastic especially for local people. Considering the elastic demand, revenue can be maximized by keeping the price lower. Further, positive externality associated with the given theme park is on account of increased tourism and the related economic boost to the nearby region but negative externality also results in the form of higher stress on infrastructure which needs to be tackled by collecting incremental revenues from foreign tourists.

 

References

Arnold, A.R. (2008). Microeconomics (9thed.), Sydney: Cengage Learning.

Gal, L. (2014), The economic impact of theme parks on regions, Retrieved on April 18, 2017 from https://aocarastirmalari.arch.metu.edu.tr/files/2014/05/AOC_ARCH714_Loredana-Gal.pdf

Krugman, P. & Wells, R. (2008) Microeconomics (2nded.), London: Worth Publishers.

Mankiw, G.(2014) Microeconomics(6thed.), London: Worth Publishers.Mankiw, G.N. & Taylor, P. (2011) Microeconomics(5thed.), Sydney: Cengage Learning.
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