Exploring briefly Microeconomics in Tourism

 

Maria Karagianni

Scotiabank, Main and Danforth, Toronto, Canada.

Antonios Vasilatos

Economist, Durham University Business School

 

 

 

Abstract

The motivation for this paper is based on a purely academic interest and attempts to map Microeconomics in a small scale focusing on the tourism industry.  The following is an outline of the course that could offer multiple concerns to our country’s policy makers. Some questions certainly arise; in fact, through the analysis of Microeconomics, people involved in tourism could trace the determinants of the viability of the country’s tourism businesses. That is why the starting point was the scientific investigation of tourism demand and supply as well as the equilibrium point and the Veblen demand curve. All these issues, of course, are the thematic orientations of tourism enterprises in relation to the current tourist demand in practice, based on the tough tourist competition. 

Keywords: tourism, macroeconomics, demand, supply

 

 

Supply and Demand

There is a general perception that economic activities are performed within the framework defined by the “law of supply and demand”.

            In economic terms, the law of demand states that there is an inversely proportional relationship between the price of a commodity or service and the quantity (of the commodity or service) demanded by the buyers, whereas regarding the rest of the parameters, prices remain stable. The logic of this “law” is: If the price of a commodity or service increases –while the prices of other commodities remain stable– then consumers will substitute this commodity or service for another cheaper commodity or a cheaper service. 

            The graphic representation of the law of demand, as the known “demand curve”, is given in the figure below, showing the total number of rooms demanded for a hotel, required in a specific area at various prices:

 

 

Figure 1: Demand Curve, (Exarchos, 2008)

 

 

On the vertical T axis, the room prices are given in euros, and on the horizontal Πο axis, the number of rooms demanded is given. In this example, point A indicates that an average price of 120 euros per room will result in the occupancy of 250 rooms. Point B indicates that an average price of euros 80 per room will result in the occupancy of 500 rooms. That is, a change in the price level also results in a change in the quantity demanded, while the remaining elements remain stable.

There are other parameters that affect the demand for the number of rooms in a particular tourist area. Room prices in other areas affect demand, as does the amount of income available to travellers–tourists. Certainly, there are many other factors-parameters, such as the popularity of a region as a destination for conferences or tourist resort, as well as the confidence of the population about future developments that have an impact on price levels or on determining demand.

A change in one of the other variables will bring about a change in demand and cause a shift of the demand curve ZZ either to the right or to the left.

If, in a neighboring area, the prices of rented rooms increase by 20%, while in the original area of our example the same price level is kept, then this event will cause an immediate shift of the demand curve to the right (Z΄Z΄), and in that area, there will be an occupancy of 750 rooms (point Γ), instead of 50 rooms that were previously occupied (point Β), for the same average price per room at 80 euros. 

      From the previous example, it is concluded that there is a direct change in demand for a service that was caused because of the rise in the price of another –substitute– service.

If the demand curve shifts to the left (Ζ΄΄Ζ΄΄), then this may mean that it was caused by an increase in air fares, resulting in fewer people traveling to that destination and an occupancy of only 250 rooms (point Δ) for the same average price per room at 80 euros. (See Figure 4).

The demand for a commodity or service may be affected by a change in the consumer’s disposable income. An increase in the consumer’s income may lead to an increase in demand for one simple commodity or service, which is not the case with an inferior commodity or an inferior service, because such an inferior commodity or service has lower demand when there is an increase in the consumer's disposable income. Thus, in our example, if the price of the hotel rooms was half, 40 euros per room, the following would happen: If there were a reduction in the consumer’s disposable income, inferior services would appear with increased demand, which means that simple services would suffer, because there would be a decreasing demand for them.

Demand is deliberately analyzed so that the business is aware of its capacities that can change it. One should also acknowledge and consider those demand-determining forces to be able to make predictions about the course of its sales. (Kiochos, P. (1989) In economic terms, the law of supply states that there is a direct relationship between the price of a commodity or service and the quantity of the commodity or service offered, while for the rest of the commodities, prices remain stable. The logic of this “law” is that: If the price of a commodity or service increases – while the prices of the other commodities remain stable– then the producers will produce a larger quantity of that commodity or service.

The graphic representation of the law of supply, as the known “supply curve”, is given in the figure below, showing the total number of rooms supplied in a hotel, required at various prices:   

Figure 2: Supply Curve, (Exarchos G. , 2008)

 

On the vertical T axis, room prices are given in euros, and on the horizontal Πο axis, the number of rooms supplied is given. In this example, point E indicates that an average price of 80 euros per room means a supply of 500 rooms. Point H indicates that an average price of 120 euros per room would mean a supply of 750 rooms. That is, a change in the price of a room also results in a change in the number of rooms, while the rest of the elements remain stable.

            As in the law of demand, other parameters-variables, other than the price, can determine the quantity of a commodity or service provided or supplied; thus, e.g. if the state wishes to encourage the construction of new hotels, it reduces the taxes of their owners, so they supply their hotel rooms at reduced prices. This will cause changes in the supply curve, and as a result, this will result in an increasing supply. 

The price of the demanded quantity (number of rooms) equal to the quantity supplied is called equilibrium point, and it is the price at which the plans of buyers and sellers match each other. This relationship is shown in the figure below, where, atn equilibrium point Θ, the quantity and quantity demanded are 500 hotel rooms, with an average price of 80 euros per room:

 

Figure 3: Equilibrium point, (Karagiannis, S., & Exarchos, G. (2006). In Tourism: Economy, Development, Politics)

 

The supply and demand equilibrium point is stable, meaning that when we reach the price of the equilibrium point, the price remains the same as long as the supply and demand does not change. If there are no changes in supply and demand, then it means there are no other market prices that affect the equilibrium price to change it.

·      If the price is below the equilibrium point, the quantity demanded exceeds the quantity supplied, buyers offer higher prices, sellers demand higher prices, and, therefore, the price is increased.

 

·      If the price is above the equilibrium point, the quantity supplied exceeds the quantity demanded, buyers offer lower prices, sellers demand lower prices, and, therefore, the price is reduced.

 

The tourism market in any country is a mix of domestic and international demand, while the international component may be relatively more important than international trade with most commodities in relation to the domestic markets of the economy. This complicates supply in relation to any other production area (demand) and demand in relation to any other tourist area (Supply). (Bull, 2002)

 

Supply and Demand of Tourist Products

The law of supply and demand suggests that the relationship between supply and demand is unchanged. Any change in either variable means also a change in the other. This is undeniably true only in some cases, because it is known that, other forces, such as advertising, marketing and human motivation –with all their complicated aspects and their consequences– exert enormous influence and impact on what people “supply” and “demand”. Travel destinations come and go depending on how they are perceived in a market. 

The law of supply and demand starts from the principle that things must remain the same and stable for this law to work, whereas in the reality of the business world, things are not the same and stable. External influences on the supplied-provided quantities and the demanded quantities of a produced service or commodity are almost always present. The factors that have a catalytic effect on making a decision as to whether we will go on vacation, conceal or include organized marketing campaigns to spread by word of mouth how great destination a specific-given location is, so that friends and families that spent their holidays in this location talk about it.   

A fact that the tourist economy is avoiding to take into account is the “obvious conclusion”, a phrase introduced by the eminent American sociologist and economist Thorstein Veblen (1857-1929), who pointed out that the conclusion is obvious about what goods and services one is going to buy when deciding "Every year we will go to the X Ski Area" or when saying "I went for a week to the Y country or region". It is a number of hotels–resorts, luxury cruises, attractive first class flights and so on, which are part of the so-called Veblen’s influence. 

Therefore, instead of the supply and demand determining the cost of production, Veblen’s influence creates new demand curves, that rely on the exclusivity of the choice of the place of destination and on the reputation of the provision of certain services in the traveller-tourist's mind. The higher the cost of an experience or a product, the more desirable it can be – at least up to a point.

Veblen’s Demand Curve, given by Professor Floyd Harmson, is as follows:

 

Figure 4: Veblen’s Demand Curve, (Karagiannis, S. & Exarchos, G. (2016). Tourist Development-Social responsibility and Reflections)

 

The previous figure shows the following:

1.     If there is a charge in the rooms at price T1, then there will be a “purchase” of Πο1 number of rooms.

2.     If there is a charge in the rooms at an increased price T2, according to the Z1 demand curve, the “purchase” of the number of rooms should be reduced to Πo2. However, based on Veblen’s Curve, this is not the case, because buyers give new meaning to the commodity-service produced, and in fact they do “purchase” a higher number of Πo3 rooms.

3.     The result of the new increased price is the increase in the quality of the service or experience provided-offered. Thus, the demand curve, instead of shifting to the left and downwards, shifts to the right and upwards, converted to Z2, due to Veblen’s influence.

4.     The price drop causes only a slight increase in the amount of “purchases”, since the shift-change will take place in the new Z2 demand curve.

5.     The increase in the price beyond T3 means a new change in the demand curve and its shifting to the right and upwards is converted to Z3, instead of showing a decline in demand to Πο5.

 

Economists like to classify commodities and services into a preferable and non-preferable consumer scale. Travelling and tourism are considered “superior preferable services” because they promise a lot and can be purchased by people as soon as their income grows. Income growth, for residents of all countries, increases the demand for travelling-tourism experiences, and sometimes, the increase in travelling experiences can be made more rapidly because of income growth.

 

Elasticity of Tourism Demand

When a demand for tourism- travel is elastic (change-sensitive) and when it is non-elastic or inelastic, it is partly dependent on the traveller-tourist’s welfare level and partly on the reason or reasons for traveling. However, most travels are carried out for more than one reason, which underlines the complexity of studying tourist demand.

From an economic point of view, elasticity in prices plays an important role for the suppliers of tourist products, since it can have a strong effect on their total revenues, because:

ΣΕ=Τ*Πο

Where: ΣΕ: total revenues of sellers in the market

 Τ: price of the commodity or service being sold

Πο: amount of sale of the commodity or service.

 

Demand elasticity (Ez) expresses the percentage change in the demanded quantity in relation to the percentage change in the price and always has a negative sign. The mathematical representation of demand elasticity is as follows:  

 

             

Where: Εz: elasticity of demand for a commodity or service

 Δπο: change in the demanded quantity of the commodity or service

 Πο: initial quantity of the commodity or service

 ΔΤ: change in the price of the demanded commodity or service

 Τα: initial price of the commodity or service.

 

·      When Ez > 1 (elastic), then it means that Total Revenues (ΣΕ) increase when there is a price (T) drop. This is because there is a percentage (%) price drop, resulting in an increase in the quantities (Πo) demanded.

 

·      When Ez < 1 (inelastic, non-elastic), it means that Total Revenues (ΣΕ) decrease to the specific price (T). This is because the percentage (%) increase in the quantity (Πo) is less than the percentage (%) reduction in the price (T).

 

On the basis of the above, it can be concluded that when the elasticity of a produced tourist product or service is known, the supplier of this tourist product may increase the total revenues (ΣΕ) by making appropriate adjustments to the price of the product produced. This, in practice, is not so easy to achieve, because elasticity in prices varies considerably and changes over time. Price elasticity is affected by multiple factors, making it difficult to draw a specific model for them. Price elasticity presupposes –above all– the existence of:

 

·  a possibility of presence of equal substitute commodities

·  a relative importance of the commodity-service in the cost budget

·  the time required for changes in prices to take place

·  a production level that imposes luxury services as a social necessity.

 

The demand for tourism or a tourist product is also affected by the consumer’s income level, because an increase in the income certainly leads to an increase in the demand for regular products, which varies, however, according to the income elasticity of the demand for each product. This is expressed by the ratio of the percentage change in quantity to the percentage change in income.

 

That is:

or

Where: ΔΠο: change in the demanded quantity of commodity Α

               Πο: initial quantity of commodity Α

               ΔΕ: change in income

                 Ε: income prior to its change.

 

·      When % ΔΠο > % ΔΕ, then the demand for the product is characterized as elastic in terms of income changes.

·      When % ΔΠο < % ΔΕ, then demand is considered inelastic.

·      When ΕΕz < 0, then the product is rated as inferior.

·      When EEz > 1, then demand is elastic in terms of income changes.

·      When EEz = 0–1, then demand is inelastic in terms of income changes.

 

When EEz is elastic, then the quantity of demand increases as income increases, and in fact, the quantity of demand increases faster than income. This means that the average increase in income may be around 3% annually, while demand for travelling abroad may rise by 9%. It is undisputed that the key factors that affect demand for international tourism of citizens belonging to the developed countries of the Western world are:

 

·  disposable income

·  the total tourist cost

 

the latter meaning “travel and subsistence costs in combination with the destination”.

The higher the income, the less one regards travel as a luxury, unlike low or middle income earners who regard travel as luxury and take total tourist costs very seriously.

 

 

Tourism Demand in Greece for the 2004-2017 period

From 2004 to 2017, the total number of arrivals of foreigners (or non-residents) in Greece shows an upward trend with some significant fluctuations over the five-year period of 2008-2013.

 

Table 1: Arrivals in Greece, (ΙΝSETE, 2018)

 

Figure 5: Evolution of Tourism Demand in Greece, drafted by the same

 

From the table and chart analysis, we see that from 2004 to 2007 there is a gradual increase of around 8.5% per year. In 2005, the annual growth was +9.94%, in 2006 +8.46% and in 2007, it reached +8.83%. The declining trend of arrivals began to be recorded as early as 2008, when a decrease of -6.43% was recorded for the whole year compared to 2009. Data on arrivals from 2010 to 2012 show that Greek tourism, despite positive indications from arrivals from some source countries, had not yet managed to come out of the recession phase since 2008. From 2013 until 2017, there is an increase in arrivals. A record year is presented in 2017 with approximately 27,000,000 arrivals and a percentage change of +9.65% in relation to 2012.

Although in each year, there is a new record for tourist arrivals in Greece over the past five years, the average daily tourist expense for the same period of time is fluctuating and does not follow the upward trend of arrivals. In particular, from 2015 onwards, it is constantly decreasing up to 2017, that has not shown a significant recovery.

Year

Expenditure in Euro

2010

68.6

2011

69.6

2012

71.1

2013

731

2014

70.4

2015

73.9

2016

66.4

2017

67.7

 

 

 

 

 

 

 

 

 

 

 

 

Table 2: Average Daily Tourist Expenditure in Greece, (Bank of Greece, 2018)

 

 

Figure 6: Evolution of the Average Daily Tourist Expenditure in Greece 2010-2017, drafted by the same

 

Methodology

In economics, we use theoretical and econometric models. There is no “simple” way of approaching a scientific issue. A variety of methodologies should be used, combining theories, econometric models and empirical data. In this paper, such a methodology was followed, combining the theory of microeconomics in tourism and an analysis of empirical data (arrivals of tourists, etc.) using a spreadsheet.

 

Conclusion

The phenomenon of “tourism” can be approached from many different angles, and as it is well known, it is the activity of people who commit themselves to travel away from home and their work. Moreover, it is also a huge business offering commodities and services to tourists- travelers and includes any expense incurred by the tourists during their travel and stay. We have come to the conclusion that, with the improvement of tourism demand, everything can change in a tourist area, demonstrating in essence its immense importance. However, apart from the improvement of tourism demand, the increase in the average daily tourist expense must also be pursued. The problem of low tourist expense, as the issue was diagrammatically observed, is multi-faced and causes concerns. For example, many historical and archaeological sites have been neglected by the Greek State, and because of this, there is a lack of state aid with financial resources (Karagianni, 2017). Thus, the average per capita tourist expense made by friends of culture is reduced as well as the lack of the necessary logistics infrastructure. The non-existence of the "biological" element in tourist areas, for example, becomes indeed another stumbling block for the strengthening of tourist expense by people with ecological consciousness. (Vassilatos, Α. &. al. (2018). 

However, the most serious factor, in our view, for the reduction of tourist expense is rather the lack of quality of service supply, and this is due to the unsustainable tax system in our country for the tourist enterprises.

            For the record:

·      there is an increase in VAT on accommodation from 6.5% to 13%

·      there is an increase in VAT on catering services from 13% to 24%

·      there is an increase in the tax rate for businesses from 26% to 29%,

·      an increase in the Unified Real Estate Tax (ENFIA) on hotels and rooms to let,

·      the imposition of a special night's fee valid from 1/1/2018 for hotels and rooms to let.

·      In our country, VAT on accommodation is at 13%, while in Spain, France and Italy it is at 10%, in Cyprus at 9%, and in Portugal at 6%.

·      In our country, VAT on catering services is at 24%, while in Portugal is at 13%, in Spain, France and Italy at 10%, and in Cyprus at 9%.

·      In our country, VAT on transport is at 24%, while in Cyprus it is at 19%, in France, Italy and Spain at 10% and in Portugal at 8%.

         Therefore, it is obvious that under such conditions, the provision of quality service is not feasible. In view of the importance of tourism in the national economy, measures should be taken by the state to improve the regulations that prohibit the increase in tourism and the provision of quality tourist products. In an era of financial crisis, this issue becomes more important, and solutions should be found to ameliorate and enhance tourism to the benefit of the national economy and incoming tourists.

 

 

REFERENCES

Bank of Greece. (2018). Bank of Greece. Retrieved April 15, 2018, from https://www.bankofgreece.gr/Pages/el/Statistics/externalsector/balance/travelling.aspx

Bull, A. (2002). Tourist Economy Athens, Klidarithmos Publications, p. 160.

Exarchos, G. (2008). Private Economy. Thessaloniki: Anikoula Publications, pp. 293, 295.

Judit Grotte (2017): Global Trends in the Hospitality Industry, pp.114-124., In: ICUBERD, Book of Papers 2017, University of Pécs, ISBN 978-963-429-212-8          

 

ΙΝSΕΤΕ ( February2018). insete. Retrieved April 25, 2018, from http://www.insete.gr/el-gr/Dashboard/Στατιστικά/Στατιστικά-Δελτία

Karagianni, M. S. (2017). Cultural Policy in Greece. In Culture Sustainability Policy-Aspects of the Greek Society, Athens: Dionikos Publications, p. 13.

Karagiannis, S. & Exarchos, G. (2006). Tourism: Economy, Development, Politics, Heraklion: Technological Research Center of Crete, p. 130.

Karagiannis, S. & Exarchos, G. (2016). Tourist Development-Social Responsibility and Reflections, Diavlos Publications, p.128.

Kiochos, P. (1989). Private Economy Athens: Synchroni Ekdotiki Publications, p. 87.

Vassilatos, Α. et. al. (2018, May). Biologic in Keramoti, Kavala. Voice of Nestos- Voice of Keramoti Insert, pp. 12-13.