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.
The diagram above shows how an increase in price for an inelastic product only leads to a smaller decrease in demand. Originally, the product was sold at price P1 with quantity Q1 demanded. After producers decided to increase the price to P2, quantity demanded fell to Q2. The value of the increase in price is greater than the value of the decrease in quantity demanded; producers are able to earn greater profit overall.
There are two main reasons for the elastic demand of hotels in London. Firstly, those who are most likely to be affected by the rising hotel rates probably have high incomes, as they would’ve needed to be able to afford the luxury of spending both time and money in the first place. This means that although they are the ones who are most affected by the increased prices, they are also the ones who are most able to afford it. Secondly, there is a lack of substitutes available for hotel rooms in London. A substitute good is one which can replace another. Because the Olympic Games are taking place in London alone for a specific time period, potential spectators will have no choice but to pay for hotel rooms in London if they wish to stay in the city, no matter the price increase.
Knowledge of the price elasticity of hotels in London during the Olympic period is important for hotel suppliers, as they can anticipate the effect of a change in price on not only the total revenue from the product, but also total expenditure. In this case, knowing that demand for hotels is inelastic enables hotel suppliers to increase their prices with the safe knowledge that total revenue will still be high.
Hotel suppliers benefit from the inelastic demand of hotels because they are able to raise prices with the knowledge that quantity demanded by tourists will still be high enough for them to earn an overall increase in profit. Tourists, on the other hand, suffer because there aren’t enough substitutes for hotels in London for them to turn to, and so most of them are forced to pay the higher hotel rates.
In the short run, both the demand for and prices of hotel rooms in London will remain high, as many tourists flock to London to spectate the Olympics. In the long run, however, once the Games are finished, there will be less of an incentive for tourists to visit London. This fall in demand would result in a decrease in price, and a return to demand being elastic – higher prices would lead to a significant decrease in demand.
In conclusion, the London 2012 Olympics has resulted in inelastic demand for hotels in the area. This has resulted in significant price hikes, as hotels seek to take advantage of tourists willing to pay extra costs in order to spectate the Games.