‘Package holidays’
Package Holidays- a segment of the market- are influenced by the effects of supply and demand. The market is flooded with package holiday suppliers, including Co-operative Travel, Thomas Cook, First Choice, Cosmos and Thompson. Providing a view on the scale and sheer size of the package holiday sub-market is the £14,687 million revenue of TUI Travel (2011), which First Choice Holidays and Thompson are a part of. In comparison, the Thomas Cook Group experienced revenue of £1.86 billion in 2011- a 3% increase in the previous year demonstrating that the effective demand for Thomas Cook services (which package holidays are a part of) is rising. Thomas Cook also boasts sales to 23.6 million customers. Although package holidays clearly contribute only a percentage of this revenue for companies, this data does illustrate the size of the package holiday market and the stable popularity of package holidays.
This recent popularity is also shown in the graph opposite. Although the demand for package holidays has clearly fluctuated, 2008 saw the first year where the demand for independent travel has fallen and demand for package holidays rose. There are several determinants of demand for package holidays. One determinant is price. A typical price for a package holiday to Tenerife for a week (two adults) with First Choice is £1300; a typical price for a package holiday to Florida for a week (two adults) with the same airline is £1600. Both of these holiday prices are scheduled during a non-peak time, meaning demand would be lower and so in turn the price would be lower comparative to a holiday during peak times. For example, for a package holiday for a week (two adults) in August- a peak time- would be approximately £2100 denoting a large shift in price in comparison to the off-peak holidays. The prices of package holidays are always more expensive in peak times e.g. school holidays, as suppliers know that at times of peak demand, the demand for holidays is price inelastic and therefore people will be more willing to pay a higher price for their holiday.
Another determinant for demand is the income of the consumer. Typically, a rise in income will cause a rise in demand for a normal or luxury (of which package holidays are a part of) good, and a fall in income will typically cause a decrease in demand for package holidays as it is not an inferior good. The price of other commodities- substitutes and complements- will also affect the demand for package holidays. If the price of a complementary good (a good which is consumed with package holidays e.g. travel insurance) rises, then the price of package holidays will be forced to rise to accommodate this change in price and thus demand will fall. However, if the price of a substitute (a good which is competitive to package holidays abroad e.g. holidays within the country) rises, then the demand for package holidays will rise, as the market involving the holidays within the country has ‘choked off’ many of its consumers due to the increase in price. Tastes and fashions can also be a determinant for the demand for a commodity. Although this determinant does not typically apply to package holidays as they are usually distanced from the fluctuating-nature of fashions and trends, an example to evidence this could be that home holidays have become more fashionable (possibly due to heavy advertising) and so people will be more inclined toward this substitute, and so demand would fall for package holidays. Similarly, heavy advertising and a fashion for package holidays would increase demand for this particular commodity. The number of consumers in a market will also affect the effective demand for a commodity. The larger the number of consumers, the larger the demand for commodities will be, typically. A growth in population will raise demand for a package holiday, simply as the market becomes more flooded with consumers. Finally, the last determinant for demand for package holidays is the distribution of income among the population. In countries (e.g. Saudi Arabia) with an uneven distribution of income, the demand for luxury items like package holidays will be higher, as in an egalitarian society the majority of the population can only afford normal goods. Recession
Question 2
Extension of demand— Increase in demand—
Contraction of demand— Decrease in demand—
An extension of supply— Increase in supply—
An contraction of supply— A decrease in supply—
Question 3
Price elasticity of demand is defined as the responsiveness of the quantity demanded to a change in the price of the product. PED is measured using the formula % change in quantity demanded/% change in price. If the PED is measured to be greater than 1, PED is elastic. When price elasticity of demand is elastic, this means that the gradient of the demand curve will not be very steep meaning that demand responds more than proportionately to a change in price. For example a 15% increase in price might lead to a 30% fall in demand. If PED is between 0 and 1, then PED is inelastic. If PED is inelastic, the gradient for its demand curve is fairly steep and this means that the change in demand will be proportionately smaller than the percentage change in price; an example of an inelastic product is tobacco, as people will continue to buy it despite the price due to it causing habitual consumption. If PED is exactly 1 then the price elasticity is said to be unit elastic, meaning that the percentage change in demand is exactly the same as the percentage change in price. If PED is equal to 0 then PED is perfectly inelastic, meaning that demand does not change at all when the price of a good changes; this is shown by a completely vertical demand curve.
Income elasticity of demand is similar to price elasticity of demand, except that it focuses on the percentage change in consumer’s income as opposed to percentage change in price.
