Question

Use a general supply and demand model to explain the following: Several hotel-resorts have opened in the past decade in Las Vegas. The Bellagio has world-class art and the Paris LV is a recreation of Paris (without the rude French people). These and other new hotels have increased the supply of rooms in Las Vegas by 25%, however, room rates have doubled over the same time. How is this possible?

Answer 1

Increase in number of hotels being opened in LV has increased the supply of hotels in the hotel market. This shifts the supply curve of hotels to the right.

Similarly, at the same time, demand for hotels has also increased because of the additional features being offered by several hotels which attract more people to the hotels. As a result, demand curve for hotels shifts to the right.

When these changes happen simultaneously, and when increase in demand exceeds the increase in supply, the hotel room rates increase to even double. This can be seen as below:

As it can be seen from the graph above, price rises to double (from P* to P') when increase in demand is more than increase in supply.