Price Elasticity of Demand in the Hospitality & Tourism Industry

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  • 0:04 Supply and Demand Background
  • 0:41 Price Elasticity of…
  • 2:06 Price Elasticity of…
  • 3:24 Applying to…
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Lesson Transcript
Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

Should you charge a traveler from England more or less money for a hotel room than a traveler from Canada? Price elasticity of demand may help answer that question. Learn more about how it applies to the hospitality and tourism industry in this lesson.

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:

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 refers to a relatively inelastic response, or inelastic demand. In other words, if the PED >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.

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