When studying Economics, students encounter a large number of theories and concepts from various schools of thoughts. The theoretical aspect of the subject is often considered boring and not useful since many people do not recognize the practical value of the studied concepts. Indeed, it may seem that some theories are applicable only on the pages of textbooks; however, their importance in everyday life is often underestimated. In today’s discussion, I will cover how economic theories may be useful when going on vacation.
The first theory that can be easily applied to the hospitality business is the supply and demand law. According to the law, an increase in the demand corresponds to the increase in the price of goods or services. Meanwhile, an inverse relationship is observed between the supply and the price. Such shifts in the price of goods restore the market equilibrium in response to the supply-demand changes. In the summer, popular vacation destinations flourish with tourists, thus the demand for accommodation in such cities increases. However, the supply of apartments, hotel rooms, and hostels in the market cannot go up in response to seasonal shifts in demand due to high costs, limitations in the city architecture, among other factors. Therefore, the price for accommodations goes up. Thus, those tourists who have a limited budget chose a different destination, or simply refrain from going on vacation and save for the next season. Therefore, the equilibrium in the market is established between the supply and demand in the hospitality market. The supply and demand theory can also be observed in the airline industry, where prices for tickets to popular tourist destinations go up when the season is high.
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Another theory that applies to vacation planning is the opportunity cost. Opportunity cost refers to the value achieved in the decision-making process when a particular alternative is chosen, while the other one is given up. For example, when planning a trip to the ocean, tourists may want to live further away from the coast but save on the accommodation. Thus, the value lost due to the travelling time and effort is lower than the value gained due to the reduced cost. Similar examples can be found when tourists opt for eating in and spending more money on attractions such as theatres and museums. Others might choose to dine out and visit the sights that are available for free. Planning a vacation always has an opportunity cost since some of the benefits are given up in order to gain others. The decision making depends on various factors, mainly the individual preferences, budget, etc.
Finally, the concept of elasticity is applicable in the tourism market. In general, elasticity measures how much one variable changes in response to the change in the other variable. Elasticity can take various forms for tourists, such as price, income, cross-price, and marketing elasticity. In my opinion, cross-price elasticity is most visible in the tourist market. People often make decisions about the destination of their trip based on the prices of substitute goods and supplementary products. That is, the price of the hotel is not a determinant factor since prices of plane tickets, car rent, cost of living and the possible alternatives are determinant in the decision-making. In addition, different types of goods can be applied to the tourism industry, and thus can determine the income elasticity of travel. For example, tourism in general is a normal good, since demand for it rises as the income goes up. Luxury goods can be described as first class plane tickets and luxury hotels since they have a high income elasticity of demand. Inferior goods, in turn, have a negative relationship between the income and demand. Examples of such goods include local fairs, campsites, etc.
