Hotel prices during London Olympics 2012 - Microeconomics IA Commentary

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Internal Assessment

Microeconomics

Word count: 727

Title: Hotel prices are hiked by 300% during the Olympics with some owners pocketing an extra £5,000

Source: The Daily Mail

http://www.dailymail.co.uk/news/article-2176799/London-2012-Hotels-prices-hiked-300-Olympics-owners-pocketing-extra-5-000.html

This article discusses how the expected demand for hotel rooms in London due to the 2012 Olympics has prompted hotel suppliers to increase their rates in an attempt to earn greater profits.

Price elasticity of demand is a measure of how responsive demand for a product is to a change in price. It is calculated by dividing the percentage change in quantity demanded of the product by the percentage change in price. There are several determinants of PED, such as the availabilty of close substitutes and the necessity of the product. The more similar alternatives there are for a product, the greater the price elasticity, as consumers could simply switch to a substitute good if the price of the original product increased. Products such as food, a necessary good, have inelastic demand; even if the price of food increases overall, people don’t have the option of simply not purchasing food anymore.

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The article states that the rates of hotels in the centre of the capital have increased on average by 139% during the period of the Games, compared to afterwards. Despite this significant increase, most hotels are still booked up and one of the few hotels with vacancies is charging an extra £5,054. The high demand despite the expensive rates shows that the demand is inelastic, as tourists are willing to go to such extents by paying extra costs. The diagram below illustrates how the inelastic demand for hotels enables suppliers to raise prices and still earn higher profits.

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