1 tourism supply 1. the decision to supply 2. time frames in tourism supply 3. production functions...

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TOURISM SUPPLYTOURISM SUPPLY

1. The Decision to Supply1. The Decision to Supply2. Time Frames in Tourism Supply2. Time Frames in Tourism Supply3. Production Functions and Inputs3. Production Functions and Inputs4. Programming Approaches4. Programming Approaches5. An Example of Linear Programming5. An Example of Linear Programming6. Costs and the general nature of supply6. Costs and the general nature of supply7. Elasticity of Supply7. Elasticity of Supply8. Inelastic Supply and Economic Rent8. Inelastic Supply and Economic Rent9. Factors Shifting Supply Schedules 9. Factors Shifting Supply Schedules

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1. The decision to supply1. The decision to supply

The act of supply requires the willingness The act of supply requires the willingness and ability of an enterprise and ability of an enterprise

>> to acquire resources, and to acquire resources, and

>> to process those resources into an to process those resources into an output of products for sale output of products for sale

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Main Main barriersbarriers to entry in tourism industry to entry in tourism industry are:are:> > A significant A significant capital requirementcapital requirement for some for some sectors sectors > > Government requirementsGovernment requirements for enterprises for enterprises to hold to hold licenseslicenses or or bondsbonds >> Competitive reactionCompetitive reaction from existing from existing enterprises enterprises >> PlanningPlanning or other or other restrictionsrestrictions on resource on resource use for tourism by governments use for tourism by governments > > The need for The need for ‘‘know-howknow-how’’

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AAn enterprise must n enterprise must address address the the questionsquestions::

> > Exactly Exactly whatwhat productproduct or or productsproducts will will be be produced?produced?

> > WhereWhere will it be produced? will it be produced?

> > WhenWhen will it be produced? will it be produced?

> > HowHow will it be produced? will it be produced? ((with what with what combination of resources and by what combination of resources and by what process method?)process method?)

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Since Since many entrepreneurs consider themselves many entrepreneurs consider themselves not as producers of a not as producers of a ‘‘tourism producttourism product’’ but as but as working within some different sectorworking within some different sector, , their their supply responses and production decisionsupply responses and production decision making may be influenced more by factors making may be influenced more by factors other than ‘other than ‘tourism industrytourism industry’ ones. ’ ones.

This means that the supply response within This means that the supply response within tourism as a whole is tourism as a whole is rarely homogeneousrarely homogeneous, , except in relation to factors which influence an except in relation to factors which influence an entire economy.entire economy.

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2. Time frames in tourism supply2. Time frames in tourism supply The short-run can be roughly identified as The short-run can be roughly identified as

a a periodperiod within which the level or scale of within which the level or scale of use of most of an enterprise’s use of most of an enterprise’s resourcesresources, , or or factors of factors of productionproduction, is , is fixedfixed assetsassets are those whose input level is are those whose input level is least least variablevariable..

What is considered to be What is considered to be short-run variesshort-run varies between different types of enterprise inbetween different types of enterprise in tourismtourism

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2. Time frames in tourism supply2. Time frames in tourism supply

At one extreme the At one extreme the tour-guidetour-guide co-operative co-operative can adjust the scale of production of its can adjust the scale of production of its services very quickly – with services very quickly – with little capitallittle capital or or landland requirement. requirement.

At the other At the other extreme extreme an airport authority may an airport authority may have to wait years for have to wait years for an expansionan expansion, as might , as might an airline wait for the delivery of new aircraft.an airline wait for the delivery of new aircraft.

Most Most staticstatic supply analysis supply analysis relates to short-run relates to short-run situations. situations.

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3. Production functions and inputs3. Production functions and inputs

Classical production theory suggests that an Classical production theory suggests that an enterprise can produce a level of output enterprise can produce a level of output QQ from from alternative combinations of inputsalternative combinations of inputs. .

The The relationshiprelationship of production is expressed as: of production is expressed as:

Q = f (N, C, L)Q = f (N, C, L) The increases in inputs used for produce goods The increases in inputs used for produce goods

and services leads and services leads inincreasescreases in the level of total in the level of total outputoutput..

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In practice there may be more than those In practice there may be more than those three inputs in order for production from three inputs in order for production from

x1......... to x1......... to xxnn.. For this reason, production function can be For this reason, production function can be

expressed as;expressed as;

Q = f (xQ = f (x11, x, x22 .... x .... xnn))

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Productivity of inputProductivity of input ii is expressed as the derivative is expressed as the derivative ddQQ/dx/dx11 where all inputs other than where all inputs other than ii are held constant. are held constant. The best example of the ability to vary productivity in The best example of the ability to vary productivity in tourism is probably that of tourism is probably that of laborlabor within a within a FF&&BB operation. operation.

Secondly, a given amount of output Secondly, a given amount of output Q Q may may theoretically be produced from varying combinations theoretically be produced from varying combinations of of inputsinputs. The alternative combinations, when . The alternative combinations, when graphed, are referred to as graphed, are referred to as isoquantsisoquants. The optimum . The optimum combination at any particular time relates to the combination at any particular time relates to the comparative costs of inputs comparative costs of inputs xx11..........x..........xnn in such a way in such a way that the minimum total cost combination (that the minimum total cost combination (isocostisocost) ) should be should be obtained. obtained.

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There are severe difficulties in applying There are severe difficulties in applying this analysis to individual enterprises in this analysis to individual enterprises in tourism industry tourism industry short-termshort-term because most because most tourism production involves tourism production involves fixed short-fixed short-runrun relationships between inputs relationships between inputs..

It is only in the It is only in the long-runlong-run that substitution that substitution for inputs becomes more importantfor inputs becomes more important..

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6. Costs and the general nature of 6. Costs and the general nature of supply in tourismsupply in tourism

Basic economic theory of costs and supply Basic economic theory of costs and supply normally assumesnormally assumes that that

> > goodsgoods are being produced, and are being produced, and

> > there is a there is a rough equivalencerough equivalence between between fixedfixed and and variablevariable costs over a given costs over a given period. period.

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6. Costs and the general nature of supply in tourism6. Costs and the general nature of supply in tourism

** TheseThese assumptions assumptions are are not not validvalid in tourism in tourism industryindustry

> > Most products are services, and most of those Most products are services, and most of those services involve the consuming tourist physically services involve the consuming tourist physically going to the producer’s ‘going to the producer’s ‘plant’plant’; that plant therefore ; that plant therefore has to exist and operate in many cases regardless has to exist and operate in many cases regardless of the number of of the number of touriststourists provided for, or provided for, or ‘‘productproduct units suppliedunits supplied’’..

> > Consequently, a major feature of tourism-supply Consequently, a major feature of tourism-supply activity is the heavy activity is the heavy influence of influence of fixed costsfixed costs. .

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Costs in tourism industry Costs in tourism industry FC - SFC (SVC) – VC full capacityFC - SFC (SVC) – VC full capacity

CostCost

00 OutputOutput

TRTR

TCTC

FCFC

VCVC

SVCSVC

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6. Costs and the general nature of supply in 6. Costs and the general nature of supply in tourismtourism

Fixed costsFixed costs (FC) represent a high (FC) represent a high proportion of total costs. proportion of total costs.

SemivariableSemivariable costs (SVC) are those costs (SVC) are those ‘lumpy‘lumpy (mass)’ costs which increase (mass)’ costs which increase with production but not on a unit basiswith production but not on a unit basis

Variable costsVariable costs (VC) are frequently very (VC) are frequently very small.small.

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If output can be sold at the If output can be sold at the same pricesame price throughout (or the throughout (or the same average pricesame average price to a to a consistent split of segmented markets), consistent split of segmented markets), then total revenuethen total revenue (TR) (TR) will increase as will increase as a a straight straight lineline;; the the maximum profitmaximum profit position position will be the same as the will be the same as the maximummaximum production and revenueproduction and revenue positions, and the positions, and the enterprise will seek always to supply to its enterprise will seek always to supply to its full capacityfull capacity..

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If the market price If the market price fallsfalls for all customers, the for all customers, the optimum supply position is still full capacity, optimum supply position is still full capacity, albeitalbeit with with reducedreduced profits. profits.

ExampleExample: : seasonalityseasonality in in tourism industrytourism industry. In . In some seasons tourism enterprises must some seasons tourism enterprises must either accept considerably reduced demand either accept considerably reduced demand or reduce prices, and hence (or reduce prices, and hence (TRTR), to fill ), to fill capacity. Either way, provided (capacity. Either way, provided (TRTR) exceeds ) exceeds ((VC + SVCVC + SVC),), a contribution is being made to a contribution is being made to fixed costs, and make its profit, from peak fixed costs, and make its profit, from peak season. season.

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Many enterprises Many enterprises will opt for will opt for full-capacityfull-capacity utilizationutilization for two reasons: for two reasons:

1. 1. The The contribution to (FC)contribution to (FC) is likely to be is likely to be greater (if TRgreater (if TR is considerably is considerably less steepless steep but but still still straightstraight, the maximum contribution is still , the maximum contribution is still likely to occur at likely to occur at full outputfull output))

2. 2. Continuity of full operation helps to Continuity of full operation helps to keep keep staffstaff and and maintain high productivitymaintain high productivity, as well , as well as being a perceived as being a perceived benefitbenefit in marketing in marketing

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Costs and revenue - Costs and revenue - TRTR11, TR, TR22, TC, TC

CostCost / revenue / revenue

TCTC

OutputOutput

VCVC

FCFC

TRTR22

TRTR11

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The The line line (TR(TR22)) is one where is one where lower unit priceslower unit prices are are required to get extra customersrequired to get extra customers. . Even in this case, Even in this case, the maximum profit position is likely to be the maximum profit position is likely to be fullfull capacitycapacity unless the unless the MR MR obtained from an extra sale obtained from an extra sale is less than is less than VCVC. This is because the . This is because the TC TC function is function is relatively relatively not very steepnot very steep - - a result of the heavy a result of the heavy fixed fixed costscosts. .

Therefore, if a hotel manager or airline station Therefore, if a hotel manager or airline station manager has a good idea of manager has a good idea of VCVCss, he or she should , he or she should be able to bargain a low price with last minute be able to bargain a low price with last minute ‘‘walk-walk-in’in’ or or ‘‘stand-bystand-by’’ customers at a level sufficient to customers at a level sufficient to cover cover ((VCVC)) and still improve profitability. and still improve profitability.

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Clearly, not all enterprises in Clearly, not all enterprises in tourism industry tourism industry face the above conditions. face the above conditions. TravelTravel agentsagents or or NTOsNTOs do not have do not have specific capacity specific capacity constraintsconstraints, and their willingness to supply will , and their willingness to supply will depend more on depend more on costs of increased laborcosts of increased labor necessary to provide necessary to provide extraextra services. services.

Their Their cost structurecost structure, like that of tourism goods , like that of tourism goods suppliers (producing items such as souvenirs), suppliers (producing items such as souvenirs), will tend to produce a more ‘will tend to produce a more ‘normalnormal’’ supply supply willingness.willingness.

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7. Elasticity of supply7. Elasticity of supply

tourism industry tourism industry enterprises enterprises aim for aim for operating at full operating at full capacity. capacity.

In the lodging sector, operators refer to their In the lodging sector, operators refer to their occupancyoccupancy raterate, expressed as a , expressed as a percentagepercentage of of capacity taken up by the marketcapacity taken up by the market

In travel and transport, the same is true, except that In travel and transport, the same is true, except that the measure is known asthe measure is known as load factorload factor. .

Many tourism attractions such as theme parksMany tourism attractions such as theme parks or or golf courses measure their golf courses measure their usage rateusage rate, which they , which they compare with some theoretical compare with some theoretical optimal visitor optimal visitor capacitycapacity..

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7. Elasticity of supply7. Elasticity of supply

Most Most short-run, individual-enterprise supply is short-run, individual-enterprise supply is extremely extremely inelasticinelastic in in tourism industrytourism industry. .

If market prices are high, If market prices are high, supplysupply will be will be at fullat full capacitycapacity,, and even if and even if lowlow, there may still be , there may still be pressure to operate at pressure to operate at full capacityfull capacity. .

ThusThus short-run industry supply is also very short-run industry supply is also very inelasticinelastic. .

Instead, suppliers will Instead, suppliers will trytry to adjust demand to to adjust demand to equalequal capacity supply by altering prices or capacity supply by altering prices or promotion. promotion.

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In the long runIn the long run, , industry supply will be industry supply will be moremore elasticelastic. This is accomplished by:. This is accomplished by:> > temporary closure out of seasontemporary closure out of season, or , or permanent shutdownpermanent shutdown. If enterprises are . If enterprises are faced with (MR) falling below (MC) or if off-faced with (MR) falling below (MC) or if off-season contribution levels are ‘season contribution levels are ‘not worth not worth the effort’the effort’> > new entrantsnew entrants to the industry, existing to the industry, existing suppliers permanently suppliers permanently expanding capacityexpanding capacity, , or doing so temporarily when market or doing so temporarily when market pricesprices are are highhigh..

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77. Elasticity of supply. Elasticity of supply

In practice, the In practice, the temporarytemporary measures are usually measures are usually associated with seasonal market associated with seasonal market variationsvariations. .

‘‘OffOff-season-season’’ does not normally mean that does not normally mean that demand demand vanishesvanishes ((dissapeardissapear),), but demand can but demand can only be sustained at much only be sustained at much reducedreduced prices. prices. Exception: Exception: off-season in skiing areasoff-season in skiing areas

Permanent changePermanent change in supply is occasioned more in supply is occasioned more by long-term trends and supplier by long-term trends and supplier anticipationsanticipations..

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8. 8. Inelastic supply and economic rentInelastic supply and economic rent

Where supply is Where supply is essentially fixedessentially fixed, increased demand , increased demand can only be translated into rationing or higher prices, can only be translated into rationing or higher prices, in which the increased return to the supplier is known in which the increased return to the supplier is known as as ‘pure‘pure economic renteconomic rent’’,, ((David Ricardo in 1815David Ricardo in 1815)). .

The potential for economic rent is high at The potential for economic rent is high at uniqueunique tourism attractions where even tourism attractions where even long-run supplylong-run supply is is fixedfixed. If products are sold . If products are sold commerciallycommercially or are or are resalableresalable, economic rent is seen , economic rent is seen in in actionaction. .

MMany such attractions are any such attractions are publicpublic goods goods..

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9. Factors shifting supply schedules9. Factors shifting supply schedules

A wholesale shifting of any supply schedule can be caused by A wholesale shifting of any supply schedule can be caused by changing market conditions for changing market conditions for products in jointproducts in joint or or competitivecompetitive supplysupply. .

With goods, joint supply normally implies by-productsWith goods, joint supply normally implies by-products but there but there are few such cases in are few such cases in tourism tourism . Services are . Services are user-specificuser-specific and and rarely contain ararely contain a by-productby-product element. element.

A version for joint supply only occurs where tourism products A version for joint supply only occurs where tourism products are also supplied to are also supplied to non-tourism marketsnon-tourism markets, and the demand is , and the demand is complementarycomplementary; ;

If conditions in any of these markets change, willingness to If conditions in any of these markets change, willingness to supply in the others may be affected. supply in the others may be affected.

If it is possible to serve all markets within capacity, then the If it is possible to serve all markets within capacity, then the products are virtually products are virtually jointjoint, but if total demand exceeds , but if total demand exceeds capacity, they are products in competitive supply.capacity, they are products in competitive supply.

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In the short-term, none of these factors In the short-term, none of these factors affects supply willingness very much affects supply willingness very much because of the because of the inherentinherent ((inseparableinseparable) ) inelasticityinelasticity of supply. of supply.

However, in the However, in the long-run, capacitylong-run, capacity, and , and hence supply schedules, will shift. hence supply schedules, will shift.

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Changes in cost, including Changes in cost, including taxationtaxation, work through the , work through the same process. same process.

In the short runIn the short run, , tourism industry tourism industry suppliers facing cost suppliers facing cost increases will not adjust supply, but will increases will not adjust supply, but will

> > either absorb the increases with reduced profit either absorb the increases with reduced profit

> > or attempt to pass them on in higher market prices, or attempt to pass them on in higher market prices, depending on their degree of market price control. depending on their degree of market price control.

Industry-wide cost changesIndustry-wide cost changes in particular (state ‘bed in particular (state ‘bed taxes’taxes’, , airport taxes) are immediately airport taxes) are immediately passed on to passed on to consumersconsumers..

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1 tourism supply 1. the decision to supply 2. time frames in tourism supply 3. production functions...

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