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Economics Microeconomic Theory Of Demand And Supply

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Question:

Discuss about the Economics  Microeconomic Theory of Demand and Supply.
 
 

Answer:

Introduction

The microeconomic theory of demand and supply has wide implications for various business decisions as the firm needs to optimize the economic factors available so as to derive maximum profit. The usage of the above microeconomic theory has been demonstrated in the light of the article selected which deals with a particular incident that has taken place and to analyze the likely impact using microeconomic theory. Further, economic decision with regards to revenue also needs to be taken based on the service outlined besides highlighting the relevant externalities along with measures to increase the share of positive externalities.

Analysis  

For a large theme park such as Dreamworld with limited presence in select locations only, the primary intended audience would be tourists along with children. Besides, the secondary audience would comprise of the domestic people who would also be visitors. It is of immense importance that the organizers must have requisite arrangements in place so as to manage any unexpected incident while ensuring that minimum damage or inconvenience is caused to the visitors (Gal, 2014).  Considering the nature of activities present and the amount of people present in the theme party, it is apparent that there may be potential safety issues that may be lurking which in such a setting could provide sizable fatalities and thereby deter the customers the visitors from paying a visit to the theme park.

Thus, such an incident would lead to demand being adversely impacted as the customers would satisfy themselves with alternative choices. The reduced demand for the services can be analyzed using microeconomic theory and the graphical aid presented below (Krugman.& Wells, 2008).

The graph above is indicative of the downward shift in the demand curve from D to D1 on account of the security concerns. The short term supply of the services by the theme park does not change and hence the equilibrium point relocates to a new point which has a lower price and lower quantity consumed for the services offered by the theme park (Mankiw, 2014).

The quantitative aspects of the impact due to fluctuations in demand and supply factors amongst other parameters would be most critically impacted by elasticity of the underlying service. In order to derive a correct estimate of elasticity of demand, certain variables need to be accounted for.  These would comprise of level of availability of cheaper substitutes along with the service type as in it is luxury or basic. Typically, luxury goods or services have higher elasticity in comparison with more basic goods which are considered almost indispensible (Mankiw & Taylor, 2011).

 


With regards to PED, the elasticity determination is contingent on the nature of the service. It is imperative that the service provided by the theme park is not a basic or essential service such as healthcare. Thus, in wake of increase in prices, it is possible to deter the visit to Dreamland. In this regards also, elasticity would be different for foreign and domestic tourists. The foreign tourists would exhibit comparatively lower elasticity in comparison with the domestic counterparts but overall the demand would be elastic with the demand elasticity value exceeding 1 in magnitude (Arnold 2008).  

Taking into consideration the above discussion, it makes sense for the operator of the theme park to keep revenue as low as possible as this would potentially maximize revenue for the park. This has been demonstrated using a numerical example relevant to the given example (Krugman & Wells, 2008).

Ticket price per individual = $ 80

Estimated customers expected at this price = 100,000

Revised ticket price per individual = $ 100

Price elasticity of demand for the theme park = -1.25

Ticket price (change in %) = [(100-80)/80]*100 = 25%

Customer volume change = 25% * (-1.25) = -31.25%

Thus, estimated consumers at P=$ 100 will be 100000*(1-0.3125) = 68,750

Revenues at P = $80 would be 80*100000 = $ 8,000,000

Revenues at P = $ 100 would be 100*68750 = $ 6,875,000

Hence, change in revenue = 6,875,000 - 8,000,000 = $ 1,125,000

Thus, on account of entry price increase, the overall revenues have declined.

A theme park of the scale of DisneyWorld has significant implications related to generation of positive as well as negative externalities. The externalities are essentially those effects which the producer does not intend to produce while delivering a service or producing a good. This may have good or bad effect on the society based on which they would be labeled.  Dreamworld would lead to positive externality generation for the local tourism industry. This is primarily because it is a hotspot for tourists and thus would attract significant tourist attention. As a result, incremental employment opportunities would be generated and also indirect benefits to the economy would be realized as the tourists would reside in the nearby places which would lead to incremental demand of food and lodging besides other services which the tourists frequently require. However, a potential negative externality arising from the park would be in the form of incremental strain on the infrastructure which would lead to higher congestion, higher rents and in general an increase in prices which would adversely impact the local people (Gal, 2014).

The local government or the state government should take measures to promote the theme park through various promotional campaigns and including it within the attractions in the various informational booklets available online and offline. Also, incentives in the form of tax rebates may be provided to those tourism companies who are able to attract foreign tourists (Mankiw, 2014).  For minimizing the attached negative externality, price differential must be maintained between foreign and domestic tourists and the revenues collected through this means should go in maintenance of the city infrastructure. The money can also be collected by levying a maintenance tax for all foreign tourists (Mankiw & Taylor, 2011).

Conclusion

From the above analysis, it is clear that demand has become lower due to threats regarding security and thus led to lower profitability. Further, considering the elastic nature of services provided by theme parks, there elasticity coefficient exceeds 1 which implies that increasing the revenue is counter-productive for the operator. Also, externalities which are beneficial and those which are harmful are both present. It is imperative that the government must take proposed measures in order to maximize the positive externality potential while minimizing the negative externality impact.

 

References

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

Gal, L. (2014), The economic impact of theme parks on regions, Retrieved on April 30, 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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