Question

1. For what reasons might the price of foreign holidays rise? In each case identify whether these are reasons affecting demand or supply (or both).

- A rise in the price of air travel (supply).

- A fall in the exchange rate, giving less foreign currency for the pound (supply – tour operators’ costs abroad rise when measured in pounds).

- The economy booms (demand – more people can afford to go on holiday; supply – inflation raises tour operators’ costs).

- The price of domestic holidays increases (demand – a rise in the price of a substitute).

- Certain tour operators go out of business or cut down on the number of holidays on offer (supply).

- Poor weather at home (demand – more people decide to take their holidays abroad).

Answer 1

1) A rise in the price of air travel is bound to increase the flight travel expenses tourists have to spend for their vacations. This thus affects the demand of tourism as the costs of reaching the destination is expensive and tourists tend to substitute their travel destinations to some other place. Thus a rise in of air tickets, reduces and affects the demand for holidays.

2) A fall in exchange rate is bound to affect the supplier of tourist activities and hospitality services. When domestic currency falls against international currency, this makes international currency stronger and as a result, more can be purchased and rendered with lesser notes of foreign currency and as a result, the supplier of tourist activities and services supply less henceforth as their profitability and revenue has reduced significantly yet the costs are higher for the same. This thus implies that a fall in exchange rate impacts the supply of hospitality services and tourism.

3) Economy booms are essential for economic growth as well as overall spending. In a boom, there are higher levels of income in the system and as a result, the demand and supply for tourism is bound to rise significantly. As there is higher levels of income and demand, the price for tourist activities and hospitality services are to increase as well.

4) If there is a rise in general price of domestic tourism, a perfect substitute for domestic tourism , international or foreign tourism's demand tends to increase. The demand for foreign tourism is bound to rise as a substitute effect of the resulting increase in the price of domestic tourism. After some time, the price of foreign tourism as well as the supply for foreign tourism is to increase as well.

5) When travel operators exit the industry, the supply for tourist activities and services decreases as well. This creates a market shortage and after some time the market price rises as a result of the supply shortage.

6) Poor domestic weather is a good sign for foreign tourism than domestic tourism. Travelers are bound to fly elsewhere for vacation as other alternatives withing the domestic nation is unavailable during bad weather conditions. Thus the increase the demand for foreign tourism and after some time, as a result of increasing demand the price of foreign tourism is to increase as well.