The business dynamics of any particular product offering are critically impacted by the associated demand and supply trends. Based on these trends, the business decisions are made which tends to have a critical effect on the business related profitability. Considering the above in mind, the selected article articulates the impact of a mishap on the firm earnings and how it leads to lowering down of the overall valuation. The objective of this particular essay is to offer a detailed discussion of the given article by deploying the relevant demand an supply concepts coupled with rice elasticity of demand so to offer better insight into the events reported in the article.
The target audience for Dreamworld would be children and tourists who would like to visit such places specially because such theme parks have only limited presence. Also considering that a lot of children and teenagers tend to visit these, it is essential that elaborate security and safety arrangements must be in place so as to prevent any mishap which could potentially prove disastrous (Gal, 2014). It is customary for the theme parks to offer joyrides and other entertainment modes which have inherent security risk in the absence of prudent safety measures. In the wake of any mishap especially one which causes casualties, the demand would likely to go down as the consumers would avail other entertainment modes which offer safety. The decreased demand would be represented in the form of a downward shift which is captured in the diagram shown follows (Krugman.& Wells, 2008).
The supply in the short run tends to remain the same and hence the decreased demand shifts the equilibrium position to a lower quantity level indicated by Q1 in comparison to the initial quantity Q. Additionally, with the decreasing equilibrium quantity, the price also takes a ldip to reach a lower level indicated by P1 (Mankiw, 2014).
The exact quantum of impact of the alterations in the respective demand and supply forces would be driven by the PED (Price Elasticity of Demand) of the concerned service or product offering. For the PED determination, a wide range of parameters are required to be considered. Some of the pivotal ones include cheaper substitute availability, product/service type and total amount of expense done on the consumption of the underlying product or service (Mankiw & Taylor, 2011). In relation to commenting on the PED determination for theme parks, the key aspect is service quality. Also, it is worth noticing that theme park does not represent a service that is a necessity but more of a luxury item considering the exclusive presence in only select locations. Additionally, in case of safety threats like in the given case, it is highly likely that the customers would potentially migrate to alternative entertainment sources which do not pose a safety risk. Thus, considering the above factors, it can be said that in the given case PED would exceed 1 (Arnold 2008). Further, the consumption and demand of the theme park services would tend to increase with the levels of income of the consumers. Considering the above aspects, it is in the best interest of the theme park operation not to increase the prices as the same may be discouraging especially for repeat visitors and would have adverse effect on the revenue. A numerical illustration of this is indicated as follows (Krugman & Wells, 2008).
Entry price assumed per person = $ 100
Estimated customers who currently visit the park annually = $ 100,000
Thus, annual revenue in the present = 100*100000 = $ 10,000,000
Let us assume that theme park service price elasticity is -1.5
Now there is an increase in the entry fee to $ 120 or 20% rise
Alternation in the visit of customers = 20*-1.5 = -30%
Annual visitors at revised price = 100,000*(1-0.3) = 70,000
Revenue with increase in price = 70000*120 = $ 8,400,000
Hence, it is abundantly clear that increasing the price would not be an advisable strategy as it leads to lower revenues.
A renowned and exclusive theme park in the form of DisneyWorld would have associated externalities which have both positive and negative effects. Externalities typically are those effect which are non-indented by the good or service provider and may be good or bad for the society. For a theme park, the positive externality would result in increased tourism potential for the local economy as these tend to be crowd pullers especially amongst tourists. This would lead to higher employment being generated and thus the income levels would income and also unemployment would touch a lower level. Also, there is opportunity to earn higher foreign currency revenues for the local economy due to more tourists being attracted and thus increase the demand for support services also such as accommodation, food, tourism services etc. But, it would result in negative externality as well because high flow or tourists tend to put the public infrastructure under constrain and would negatively impact the availability of services to the domestic people (Gal, 2014).
For promotion of positive externality, it is imperative that government should promote the theme park in an active manner through information guides and also provide various tax and other incentives or benefits to the tourism companies who manage to attract visitors to the theme park (Mankiw, 2014). For reducing the negative externality associated, a higher price may be charged from foreign nationals who would likely not be repeat visitors and hence less elastic in their demand. This incremental charge would be collected by the government and used for public infrastructure maintenance and expansion for public good (Mankiw & Taylor, 2011).
Hence, it would be fair to conclude that security concerns would result in lower demand and lower price. Also., the PED for theme parks is greater than 1 and hence revenue increase does not maximize the revenue. Further, externalities are associated in the form of positive impact on the local economy while negatively impacting the available public infrastructure in the region. However, this can be managed by charging an incremental amount which can be used for public infrastructure maintenance.
Arnold, A.R. (2008). Microeconomics (9thed.), Sydney: Cengage Learning.
Gal, L. (2014), The economic impact of theme parks on regions, Retrieved on April 28, 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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