ECONOMICS OF TOURISM AND

HOSPITALITY(BSTM2001)

CHAPTER 3: The Market for Recreation,

Leisure and Tourism Products

BSTM2001
© Dr. Mohammed Ali Obaid, NIZWA CAS
 Chapter Learning outcomes
On successful completion of this chapter, students should be able to:

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CHAPTER (3) SLIDE (2)
 Tourism Market

• A market is a group of buyers and sellers

of a particular good or service.
• The terms demand and supply refer to
the behavior of people . . . as they
interact with one another in markets.
• Buyers determine DEMAND, and Sellers
determine SUPPLY.
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CHAPTER (3) SLIDE (3)
 Tourism Demand

• Tourism Demand: The quantity of tourism

products that the buyers (Tourists) are willing
and able to purchase.
• Effective Demand: is more than just the
wanting of something, but it is defined as
‘demand backed by cash’.

DEMAND WILLINGNESS ABILITY

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CHAPTER (3) SLIDE (4)
 Factors Affecting Tourism Demand

Law of Demand • Disposable income

• Price of other goods
The law of demand • Comparative quality/value
states that, other added
things equal, the • Fashion and tastes
quantity demanded of • Advertising
a good falls when the • Opportunities for
consumption
price of the good rises.
• Population
• Other factors.
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CHAPTER (3) SLIDE (5)
 Demand and Own Price
• Generally, as the price of a good or a service
increases, the demand for it falls.
• As indicated in table 3.1 and figure 3.1, The demand
curve slopes downwards to the right and plots the
relationship between a change in price and
demand.
• The reason for this is that as prices rise consumers
tend to economize on items and replace them with
other ones if possible.
• This will be applicable with assuming that other
factors have no influence (other things equal).
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Demand and Own Price

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CHAPTER (3) SLIDE (6)
Demand and Other Factors
Since the demand curve describes
the relationship between demand
and price, these other factors will
affect the position of the demand
curve and changes in these factors
will cause the demand curve to shift
its position to the left or the right.

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 Demand and Other Factors
• Disposable income is defined as income less direct taxes but
including government subsidies.
• The effect of a change in disposable income on the demand for

Disposal Income
a tourism product depends on the type of product under
consideration:
– Normal or superior products: as disposable income rises, so does
demand. This applies to most hotels, holidays abroad and
membership of leisure clubs.
– Inferior products: Inferior products are cheap substitutes for other
ones such as cheap hotel rooms, bed and breakfast
accommodation, domestic holidays, cheap-range music systems
or other products without a leading brand name. As income rises,
the demand for inferior products declines as people start to
demand the normal goods that they can now afford.

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CHAPTER (3) SLIDE (8)
 Demand and Other Factors
Figure 3.2 shows the
different income
consumption curves for
superior and inferior
goods. As income rises
from A to B, the demand
for superior goods rises
from C to E, whilst the
demand for inferior
goods falls from C to D.

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CHAPTER (3) SLIDE (9)
 Demand and Other Factors
• Disposable income is defined as income less direct taxes but
including government subsidies.

Price of other Products

• The effect of a change in disposable income on the demand for
a tourism product depends on the type of product under
consideration:
– Normal or superior products: as disposable income rises, so does
demand. This applies to most hotels, holidays abroad and
membership of leisure clubs.
– Inferior products: Inferior products are cheap substitutes for other
ones such as cheap hotel rooms, bed and breakfast
accommodation, domestic holidays, cheap-range music systems
or other products without a leading brand name. As income rises,
the demand for inferior products declines as people start to
demand the normal goods that they can now afford.

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CHAPTER (3) SLIDE (10)
Demand and Other Factors

Price of other Products

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CHAPTER (3) SLIDE (11
 Demand and Other Factors

Quality/Value Added
• Consumers do not just consider price when
comparing goods and services – they also

Comparative
compare quality.
• Improvements in the quality of a good or service
can be important factors in increasing demand

• Fashion and tastes affect demand for leisure

Fashion and Tastes

goods and services as in other areas.
• For example, World Cup rugby and football events
have a big impact on sales of sports clothing and
merchandise as do the successes of teams in
national leagues.
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 Demand and Other Factors
• The aim of most advertising is to increase the demand for
goods and services.

Advertising
• The exception to this is advertising that is designed to
inhibit the demand for some goods and services. For
example, many governments fund advertising campaigns
to inhibit the demand for cigarettes and drugs.

• Unlike many sectors of the economy, many leisure and

Opportunities for
tourism activities require time to participate in them.

consumption
• Thus, the amount of leisure time available will be an
important enabling factor in demand.
• leisure time depends on two factors: average working
weeks and the amount of paid holidays.

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 Demand and Other Factors
• Population trends are an important factor in the
demand for recreation, leisure and tourism.
• Demand will be influenced by the size of population
as well as the composition of the population in
terms of age, sex and geographical distribution; for

Population
example, the leisure requirements of a country are
likely to change considerably as the average age of
the population increases.
• The location of leisure facilities similarly needs to
be tailored to the migration trends of the
population.

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 Demand and Other Factors
• Terrorism has had a significant impact particularly on some types of
tourism in recent years.
• The terrorist attacks caused a shock to tourists’ utility and a change in
the destinations’ image and attractiveness.
• For example, the 11 September 2001 events had the following impacts:
– A growing demand for security;

Other Factors
– A shift in focus towards tourism in domestic markets (i.e. less foreign
travel);
– For foreign travel, an increasing tendency to travel to relatively close and
familiar destinations (i.e. those in the same geographic region);
– Greater importance being placed on visiting friends and relatives as a
reason for travelling;
– A growth in the number of short trips and city breaks (although not to large
city destinations);
– A decreasing interest in adventure tourism and a growing interest in travel
that emphasizes experiencing local cultures or proximity to nature.

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 Tourism Supply

• Tourism Supply: The quantity of tourism

products that the sellers (suppliers) are willing
and able to sell.
Factors Affecting Tourism Supply

• Prices of other goods supplied

• Changes in production costs
Price •
•
Technical improvements
Taxes and subsidies
• Other factors (e.g. industrial relations).

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 Supply and Own Price
• Generally, as the price of a good or a service
increases, the supply of it rises.
• As indicated in table 3.4 and figure 3.3, The supply
curve slopes upwards to the right and plots the
relationship between a change in price and supply.
• The reason for this is that, as prices rise, the profit
motive stimulates existing producers to increase
supply and induces new suppliers to enter the
market.
• This will be applicable with assuming that other
factors have no influence (other things equal).
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CHAPTER (3) SLIDE (17)
 Supply and Own Price

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CHAPTER (3) SLIDE (17)
 Supply and Other Factors

• An increase in the price of a particular product will cause the

Price of other Goods

producer to redeploy resources towards that particular
product and away from other ones.

supplied
• For example, a rise in the price of hotel rooms will cause
owners of buildings and land to consider changing their use.
• Another example, Airlines are particularly able to adapt their
routes and redeploy their aircraft as demand patterns
change.

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 Supply and Other Factors

Production Costs
The main costs involved in production are labour costs,
raw material costs and interest payments. A fall in these

Change in
production costs will tend to stimulate supply shifting the
supply curve to the right, whereas a rise in production
costs will shift the supply curve to the left.

• Changes in technology will affect the supply of goods

Technical Improvement
and services in the leisure and tourism sector.
• An example of this is aircraft design:
design the development
of jumbo jets has had a considerable impact on the
supply curve for air travel.
• Another example is leisure devices such as phones,
cameras, TVs and computers. The supply curve for
these goods has shifted persistently to the right over
recent years
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CHAPTER (3) SLIDE (19)
 Supply and Other Factors
• The supply of goods and services is
affected by indirect taxes such as
sales taxes and also by subsidies.
Taxes and Subsidies

• In the event of the imposition of

taxes or subsidies, the price paid by
the consumer is not the same as the
price received by the supplier.
• For example, assume that the
government imposes a $20 sales tax
on hotel rooms. Where the price to
the consumer is $200, the producer
would now only receive $180.
• The whole supply curve will shift to
the left since the supplier will now
interpret every original price as being
less $20.

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CHAPTER (3) SLIDE (20)
 Supply and Other Factors
• There are various other factors
which can influence the supply of

Other Factors
leisure and tourism goods and
services, including strikes, wars
and the weather.
• For examples: Arab Spring, War in
Iraq and Syria.

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CHAPTER (3) SLIDE (21)
Demand and Supply
 Equilibrium Price
• Equilibrium refers to a situation in which the price has reached
the level where quantity supplied equals quantity demanded.
• Equilibrium Price
– The price that balances quantity supplied and quantity
demanded.
– On a graph, it is the price at which the supply and demand
curves intersect.
• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the
equilibrium price.
– On a graph it is the quantity at which the supply and demand
curves intersect.
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CHAPTER (3) SLIDE (23)
 Equilibrium Price
• As illustrated in
Figure 3.5, the
equilibrium price is Surplus

at $160, where the

quantity demanded
by customer is
equal to quantity
Shortage
supplied by
suppliers (3200
Rooms)

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CHAPTER (3) SLIDE (24)
 Equilibrium Price
• Surplus
When price > equilibrium Surplus
price, then quantity
supplied > quantity
demanded.
–There is excess supply or
a surplus.
Shortage
–Suppliers will lower the
price to increase sales,
thereby moving toward
equilibrium.

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CHAPTER (3) SLIDE (25)
 Equilibrium Price
• Shortage
When price < equilibrium Surplus
price, then quantity
demanded > the quantity
supplied.
–There is excess demand
or a shortage.
Shortage
–Suppliers will raise the
price due to too many
buyers chasing too few
goods, thereby moving
toward equilibrium.

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 Changes in Equilibrium Price

• In the example of four-star hotel rooms, a fall in the price of

substitutes, for example five-star hotels, will cause the demand
curve to shift to the left from D0 to D1. The supply curve will
remain unchanged at S0.

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CHAPTER (3) SLIDE (27)
 Changes in Equilibrium Price
Figure 3.6 shows the effect of this
on equilibrium price. The original
price of $160 will no longer be an
equilibrium position since
demand has now fallen to 2800
units a day at this price. There is
now excess supply of 400 units
per day, which will cause
equilibrium price to fall until a
new equilibrium is achieved at
$150 where demand is equal to
supply at 3000 units a day.

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 Changes in Equilibrium Price

• In the example of four-star hotel rooms the effect of the

imposition of a tax is shown in Table 3.9. A tax will cause the
supply curve to shift to the left from S0 to S1, but the demand
curve will remain unchanged at D0 as illustrated in Figure 3.7.

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CHAPTER (3) SLIDE (29)
 Changes in Equilibrium Price

The original price of $160 will

no longer be in equilibrium
since supply has now fallen to
2800 units a day at this price.
There is now excess demand of
400 units per day, which will
cause equilibrium price to rise
until a new equilibrium is
achieved at $170 where
demand is equal to supply at
3000 units a day.

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CHAPTER (3) SLIDE (30)
Key Terms
1. Tourism Market
2. Tourism demand
3. Tourism Supply
4. Disposal Income
5. Equilibrium
6. Equilibrium Price
7. Surplus

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CHAPTER (3) SLIDE (33)