Price Elasticity of Demand in Hospitality & Tourism (PDF)

4/13/24, 2:47 PM Price Elasticity of Demand in the Hospitality & Tourism Industry - Lesson | Study.com Price Elasticity of Demand in the Hospitality & Tourism Industry Price elasticity of demand (PED) measures how responsive consumer activity and demand are to pric...

4/13/24, 2:47 PM Price Elasticity of Demand in the Hospitality & Tourism Industry - Lesson | Study.com Price Elasticity of Demand in the Hospitality & Tourism Industry Price elasticity of demand (PED) measures how responsive consumer activity and demand are to price changes. Identify the formula and application of this concept specifically in the hospitality and tourism industry. Supply and Demand Background Surely, you've heard of supply and demand right? Supply refers to the notion of how much of a product or service a market can (or wants to) offer up (especially at a certain price). Demand is the concept of how much, quantity-wise, that same product or service is desired by the market (especially at a certain price). Supply and demand can be driven by a change in price of the product or service. We're going to focus on the latter two aspects: demand and price in something called price elasticity of demand. Then, you'll learn how it can be related to the hospitality and tourism industry. Price Elasticity of Demand Defined Imagine that you're running a business. You have two products that you make and sell. One is a laptop and the other is a desktop computer. Your laptop is currently priced at $1,000 and sells 100 units a year. Your desktop is currently priced at $1,000 and sells 100 units a year as well. Let's just say that you drop the price of the laptop by an enormous 50%, to $500 a piece. Despite the big sale, you end up selling 101 units that year. That's a measly one unit more than before. Because demand barely changed with a large change in price, you would say the product or the demand for the product is inelastic. Now, let's say you drop the price of the desktop to $999 a piece. That's a puny $1 discount. However, you end up selling 300 units that year, or three times as much! Because demand for the product changed immensely with only a small change in price, you can say that the product or the demand for the product is elastic. Thus, the price elasticity of demand (PED) can be used to measure consumer sensitivity to price. In other words, all else equal, PED shows us how elastic (responsive) consumer demand is for a product or service given a change in price for that product or service. Price Elasticity of Demand Formula Calculating PED is pretty simple. All you need to know is that: https://study.com/academy/lesson/price-elasticity-of-demand-in-the-hospitality-tourism-industry.html 1/4 4/13/24, 2:47 PM Price Elasticity of Demand in the Hospitality & Tourism Industry - Lesson | Study.com PED = Q / P Where: Q = % change in quantity demanded P = % change in price Note: the PED is the absolute value of the Q/P ratio. You can either take the absolute value of PED at the end of your calculation or simply use positive numbers for Q and P in the first place. We'll stick to doing the latter. Let's do a quick example. Let's say that you increase the price of your laptop by 10%. This causes the demand to fall by 20%. Thus: PED = Q / P = 20 / 10 = 2 Generally, a PED of >1 refers to a relatively elastic response, or elastic demand, while a PED of 1, then the market is price sensitive, as was the case in this example. A PED of 1 indicates unitary elasticity. That means that a change in price leads to an equal change in demand. Applying to Hospitality & Tourism The average PED for the international tourism and hospitality industry ranges from 0.6 to 2. This wide range exists for a variety of factors. One of these factors depends on the traveler's purpose. If a person is traveling for business, they are less sensitive to a change in price. The average PED of a business traveler is about 0.18. One reason for this is because a business traveler may not have an alternative destination to choose from or many hotels to pick from, since they have to be exactly where they are. Getting a hotel in a nearby city, even if cheaper, may be impractical so they may pay more for a hotel near their business event, even if the price for the hotel goes up quite a bit. Another reason could be a business traveler's inflexibility in terms of time.They have to be at a certain place at a certain time and thus may not be able to delay a business trip in their search for better prices. On the flip side, a leisure traveler, going away on vacation, is more sensitive to price because they are free to choose where they go and price is going to play a big part in their decision. They don't have to fork out a large sum on an expensive destination because they don't technically have to be there. Thus, it's not surprising that a leisure traveler has a PED (on average) of roughly 1.23. Other factors play a role, of course. For instance, exchange rates can influence the PED. A 1% increase in the U.S. Dollar/British Pound exchange rate decreases US travel to the UK by 1.4%. The destination also matters. A person living in England will have a PED of about 2.01 for travel to the U.S. but only a PED of 1.37 for travel to France. Why? Well, France is right across the channel but https://study.com/academy/lesson/price-elasticity-of-demand-in-the-hospitality-tourism-industry.html 2/4 4/13/24, 2:47 PM Price Elasticity of Demand in the Hospitality & Tourism Industry - Lesson | Study.com the U.S. is an ocean away! This means U.K. residents must already spend a lot of their budget just to get to the U.S., leaving them more sensitive to price changes for things they may need while in the U.S., like hotel accommodations. Lesson Summary Let's review. First, supply refers to the notion of how much of a product or service a market can offer up., while demand is the concept of how much, quantity-wise, that same product of service is desired by the market. The price elasticity of demand (PED) is used to measure consumer sensitivity to price or how elastic (responsive) consumer demand is for a product or service given a change in price for that product or service. Calculating PED is quick and easy: PED = Q / P Where: Q = % change in quantity demanded P = % change in price A PED of >1 refers to a relatively elastic response, or elastic demand. A PED of