Question:
Describe about the understanding the Business economics and environment.
In considering the fundamentals of demands, it can be inferred that demand refers to the quantification of the service or products demanded by the purchasers. Mohammed, Guillet and Law (2015) explained that the quantification of the demands is representing the approaches of the customers who are willing to purchase the product or services with a specific pricing structure. On the other hand, supply process has been indicating the amount of the products or services that the market can offer to the purchasers. It is to be noted that the prices in school holidays is always based on the high demands (Davidoff 2015). During the school holidays, people can get their free time and most of the families plan their vacations outside. The students also get the free time from their student life and studies. The vacation time is the best period to set for a holiday. Hence, it is quite clear that the people would opt for the holiday mostly during this period. Hence, the prices of the holiday packages or tour accessories would be higher. In addition, it can be stated that the demands would be higher. The analysis is shown in the following diagram.
Business economics is considered as the applied microeconomics. Generally, it fulfills the gap between the business practices and pure economic theory. Therefore, the business economics is counted as the fusion of mathematics, decision science, logical science and economics that helps in taking rational and optimal business decisions. This incorporates the economic theories with the business practices. Thus, it is known as science of decision making. It has been found that the scope of business economics is much narrow than the pure economics. The business economics covers various aspects. These include – firstly, demand analysis and forecasting, secondly, cost analysis, thirdly, profit analysis and fourthly, capital management, fifthly, production analysis, sixthly, price determination and methods of price detection, objectives of the organization and the business environment (Pindyck and Rubinfeld 2013).
The economic factors that is required for the tour operators or the economic factors that are taken into account in selling the price of their package holidays include – cost of travel, cost of services, competitive prices and exchange rate.
Cost of travel – The cost of travel is an important economic factor for a tour operator. The reason behind this is that any organization or any business totally depends on the cost or expenses. As the inflow of the money should be more than the outflow of money as this situation only helps an organization to bring in profit. For the tour operator, the travel is the essential factor of the business. Thus, before setting the prices of the tour packages, the tour operators calculate the expenses of travelling and total tour package, such that on the basis of the total expenses of travelling, the tour operator fixes or decides an amount for the tour package (Smith, Round and Perloff 2014). This helps the tour operator to earn a profit percentage based on the total cost of travel.
Cost of services – The tour operators provide various services to the customers that are the tour operators provide food and lodging to the customers (Krugman and Wells 2013). They also provide travelling vehicles to the customers in order to travel from one place to another. All these services are provided by the tour operators to their customers on a basis of a fixed cost. Depending on this cost, the rate of the holiday packages is fixed by the tour operators in order to earn a higher amount of profit and also to satisfy the customers by providing first class service to them.
Competitive Prices – Nowadays the tourism industry has a continuous growing prospect. The demand of the people for the packaged tour has increased to a larger extent. Thus the total numbers of competitors that are the numbers of tour operators have been increased in the market with the passage of time (Perloff 2012). Therefore, it can be said that the competition in the tourism market has increased. So, it is an important factor that the particular tour operator has to keep in mind about the costs and the expenses that are incurred by the other tour operators in the same market. As if the other tour operators or the competitors provide the same tour packages for lower price, then all the customers will refer to them for any kind of travelling. Thus, it can be said that the competitive prices are an important element of economic factor. The particular tour operator or tour agent should fix a price for every tour packages or holiday packages depending on the prices fixed by the other tour operators or the competitors of the market. The reason behind this is that the competitors play an important in the highly competitive market of the tourism industry.
Exchange Rate – The price of the currency of a nation in terms of another currency is termed as exchange rate of currency. Therefore, the exchange rate has mainly two components – the foreign currency and the domestic currency and thus it can be quoted both indirectly and directly (Hubbard and O’Brien 2013). The economic growth rate can be increased by various types of exchange rate. These include – strong exchange rate can lead to growth in economy, devaluation also causes a boost to economic growth and finally, the fixed exchange rate also helps in the economic growth. The tourism industry also involves travelling from one country to another. Thus, the exchange rate plays an important role in the tourism industry. Therefore, the tour operators also put focus on the exchange rate in order to run the business successfully, as the operations and the regulations of the tourism industry are directly related with the exchange rates (Krugman and Wells 2012). Thus, the exchange rate is also considered as one of the important economic factor for tourism industry.
Diagram 1: Demand curve during in School terms
(Source: Created by Author)
The demand curve shown above clearly illustrates that during school term the price of the tour tickets are high and henceforth the quantity demanded is low. Similarly during the holidays the price of the tour tickets are low and this is the reason for a higher demand of quantity. It can be further noted that the magnitude of the participant to avail the service is lower during the school term. This caused due to increasing demand during school holidays and decreasing demand during the term.
Diagram 2: Demand curve during Holidays
(Source: Created by Author)
Similarly, during the school time, families of the student do not get the enough time to plan for the holiday tours. More specifically, students usually stay occupied with their studies, exams, and other curriculum activities. Hence, during the school time, the demand gets lower and prices also decrease. The demand and supply curve therefore suggest the lower level in this period. The decreasing demands and the prices are shown in the following diagram. The customer may perceive the decreasing level of prices, but during such time, the demands decreases.
It is noted that the transactions between the tourism firms and tourists usually suggest the larger amount, which includes the price of the production of holidays. On the other hand, Chen et al. (2016) argued that the prices structured by the tourists often involve the modest amount. However, due to the larger flow of the international tourism, the transaction is needed to be frequent. In such circumstances, it is much required to get the idea about the exchange rates, which are helpful enough in making the rational decisions. The tourism companies usually face the potential risks in such matter. When the tourists have to pay a certain amount for the fixed package, they usually do not pay the further money (De Vita 2014). In such cases, the changes in the exchange rate in another country can charge for the extra amount, which can be risky. For example, in New York, the price of hotel room with a breakfast may cost almost $100. If the tour operator deals with Euro as the nation currency, it will be equal to $1.2814 per Euro (1€=$1.2814). If the tour operator asks the bank to transfer a certain amount of money in Euro currency, it may differ from the exact amount of the expenses required in American hotels.
Therefore, this segment can be risky for the tour operators, as they need to identify the exchange rate, which converts the charges of all the inclusive trips in different countries. Simultaneously, the tour operator needs to inform the tourists about the exchange rates regarding the spot and forward prices (Chang, Hsu and McAleer 2013). It is to be indicated that the elimination of the risk factors related to such pricing structure can be possible if the information is flexible and fixed. Especially, the countries, which signify the direct offers, need to maintain such structural aspects while determining the costs related to the exchange rate (Adrian, Etula and Shin 2015). It is important for the tour operators to include this particular clause while structuring the catalog that is needed to be provided to the tourists before they take any tourism package.
References
Adrian, T., Etula, E. and Shin, H.S., 2015. Risk appetite and exchange rates.
Chang, C.L., Hsu, H.K. and McAleer, M., 2013. Is small beautiful? Size effects of volatility spillovers for firm performance and exchange rates in tourism. The North American Journal of Economics and Finance, 26, pp.519-534.
Chen, J.M., Neuts, B., Nijkamp, P. and Liu, J., 2016. Demand determinants of cruise tourists in competitive markets: motivation, preference and intention. Tourism Economics, 22(2), pp.227-253.
Davidoff, T., 2015. Supply constraints are not valid instrumental variables for home prices because they are correlated with many demand factors.Available at SSRN 2400833.
De Vita, G., 2014. The long-run impact of exchange rate regimes on international tourism flows. Tourism Management, 45, pp.226-233.
Hubbard, R. and O’Brien, A. (2013). Microeconomics. Boston: Pearson.
Krugman, P. and Wells, R. (2012). Microeconomics. New York, N.Y.: Worth Publishers.
Krugman, P. and Wells, R. (2013). Microeconomics. New York, NY: Worth Publishers.
Mohammed, I., Guillet, B.D. and Law, R., 2015. The contributions of economics to hospitality literature: A content analysis of hospitality and tourism journals. International Journal of Hospitality Management, 44, pp.99-110.
Perloff, J. (2012). Microeconomics. Boston: Pearson.
Pindyck, R. and Rubinfeld, D. (2013). Microeconomics. Boston: Pearson.
Smith, R., Round, D. and Perloff, J. (2014). Microeconomics. Frenchs Forest, N.S.W.: Pearson Australia.
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