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					RESOURCES in
  TOURISM

  Tourism Economics
       THM 304
THE ECONOMIC PROBLEM: SCARCITY AND CHOICE




  FIGURE 2.1 The Three Basic Questions
        THE ECONOMIC PROBLEM

capital
Things that are themselves produced
and that are then used in the
production of other goods and
services.
factors of production
The inputs into the process of
production. Another word for
resources.
        THE ECONOMIC PROBLEM:

production The process that transforms
scarce resources into useful goods and
services.
inputs or resources Anything provided by
nature or previous generations that can be
used directly or indirectly to satisfy human
wants.
outputs Usable products (goods and
services)
SCARCITY, CHOICE, AND OPPORTUNITY COST
SCARCITY AND CHOICE IN A ONE-PERSON
ECONOMY

 Nearly all the same basic decisions
 that characterize complex economies
 must also be made in a simple
 economy.
SCARCITY, CHOICE, AND OPPORTUNITY COST

   Opportunity Cost
The concepts of constrained choice and
scarcity are central to the discipline of
economics.


 opportunity costs The best alternative
 that we give up, or forgo, when we
 make a choice or decision.
SCARCITY, CHOICE, AND OPPORTUNITY COST

  Capital Goods and Consumer Goods


consumer goods Goods
produced for present consumption.

investment The process of using
resources to produce new capital.
   SCARCITY, CHOICE, AND OPPORTUNITY COST
      THE ECONOMIC PROBLEM
Recall the three basic questions facing all
economic systems:
   (1) What gets produced? Goods and
services
   (2) How is it produced? Production
methods
   (3) Who gets it?
Given scarce resources, how exactly do large,
complex societies go about answering the
three basic economic questions?
           ECONOMIC SYSTEMS

    COMMAND ECONOMIES


command economy An economy in
which a central government either
directly or indirectly sets output
targets, incomes, and prices.
        ECONOMIC SYSTEMS
LAISSEZ-FAIRE ECONOMIES: THE FREE
MARKET
 laissez-faire economy Literally from the
 French: “allow [them] to do.” An economy
 in which individual people and firms
 pursue their own self-interests without any
 central direction or regulation.

market The institution through which
buyers and sellers interact and engage in
exchange.
          ECONOMIC SYSTEMS

    Consumer Sovereignty


consumer sovereignty (dominance)
The idea that consumers ultimately
dictate what will be produced (or not
produced) by choosing what to
purchase (and what not to purchase).
     ECONOMIC SYSTEMS

   Individual Production
   Decisions: Free Enterprise


free enterprise means The
freedom of individuals to start and
operate private businesses in
search of profits.
            ECONOMIC SYSTEMS
    Distribution of Output
The amount that any one household gets
depends on its income and wealth.

Income is the amount that a household earns
each year. It comes in a number of forms:
wages, salaries, interest, and the like.

Wealth is the amount that households have
accumulated out of past income through
saving or inheritance.
        ECONOMIC SYSTEMS
MIXED SYSTEMS, MARKETS AND GOVERNMENTS


The differences between
command economies and
laissez-faire economies in their
pure forms are enormous. In
fact, these pure forms do not
exist in the world; all real
systems are in some sense
“mixed.”
             TOURISM CONCEPTS


 Tourism  is neither a phenomenon nor a
simple set of industries. It is a human
activity which encompasses human
behavior, use of resources and interaction
with other people, economies and
environments.

 It also involves physical movement of
tourists to locales other than their normal
living places.
     Travel and Tourism Includes:

   Tourist needs and motivations
   Tourism selection behavior and
    constraints
   Travel away from home
   Market interactions between tourists
    and those supplying products to
    satisfy tourist needs
   Impacts on tourists, hosts,
    economies and environments.
 Economics plays a role in many of
these areas, particularly where
 there is a need to analyze market
forces relating demand by tourists to
supply of 'products', and
 analyzing economic impacts and
measures to control tourism's effects.
In addition, however, there are
 specific and supporting organizations,
 such as tourist information centers,
 souvenir manufacturers and retailers
 or brochure distribution companies.

Because of this complex range, it is
 useful to attempt to classify the
 industries into sectors;
                 Classification;
   carriers – in any form of transport for
    tourist travel
   accommodation
   man-made attractions – which could also
    include the managed areas of natural
    attractions
   private sector support services
   public sector support services
   „middlemen’ – such as tour wholesalers
    and travel agents.
  The majority of organizations in
travel and tourism are concerned
primarily with their own individual
product, and probably at best with
the marketplace represented
within their sector.
           Tourism Product

   When asked what their 'product' is,
    most hoteliers will reply
    'accommodation', most agents
    'travel services', and so on.

   Thus, in their view most will not
    claim to be supplying a product
    called tourism.
This immediately creates a problem in an
economic analysis of the field, in that the
products felt to be supplied by the members
of the industry are not necessarily the same
as those products perceived to be in demand
by consumers.

Tourists on the whole are likely to have a
more global concept of the travel and tourism
product which they are buying than are
individual suppliers.
 To compound the difficulties, the end
benefits which many tourists seek may
not be tradable products at all.

 For example, one tourist may really
wish to purchase the chance to sit on a
sunny beach for a week, to obtain the
end benefits of total relaxation, restore
well-being and a good sun-tan.
Another simply demands the opportunity
for a face-to-face business meeting in
order to close a sales contract for his or
her company.

In neither case are these tourists really
seeking to buy tradable products, but
rather than a dream, total experience,
activity, or business opportunity.
As travel and tourism organizations
 develop, their marketing becomes
 sophisticated, they are tending to
 operate more from a consuming
 tourist's point of view,
in, say, putting together inclusive tour
 packages or promoting non-tradable
 end benefits,
rather than their own individual
 products.
          Resources for Tourism

It is normal for economists to divide
resources into those which are
considered free (that is they are in such
abundance that there is no need for any
mechanism to allocate them to users) and

those which are scarce (where their
supply in general is limited in respect
to their actual or potential demand).
 Most economic study is concerned with
production and allocation decisions about
these scarce resources.
 The ways in which outcomes of these
decisions are determined are central
concerns of economic study, both in general
and in relation to specific activities.
 So one of tourism economics' main areas
of study must deal with these following
questions:
               Questions

   What resources allocation
    mechanisms apply in generating
    areas at destinations?

   How does tourism compare with
    other activities or industries in
    competing for scarce resources?
               Questions
   What competition for resource use,
    as well as for markets, is there
    between suppliers in travel and
    tourism?

   Are there significant opportunity
    costs involved in using particular
    resources for tourism use?
      Travel and Tourism Resources
From the earlier definitions and consequent
discussion, two main problems immediately
appear:

 As there is frequently a mismatch        between
producer and consumer perceptions          of what
constitutes the tourism product, there     may be
conflict in ideas of which resources are   properly
involved.

 Many of the resources likely to be in demand for
tourism are public goods, or even free resources.
 While it may be argued that in today's
world, there are really very few,
if any, free resources left-that virtually
(almost) any human activity makes
demands on this world for which someone
at sometime will have to pay,
undoubtedly the demand for tourism
involves a substantial amount of public
goods.
These may be defined as existing
 facilities which are underutilized,
 where an individual make use of
 them without reducing the
 amount of the facilities available
 to others: that is a situation of
 zero opportunity cost.
 Traveland tourism suppliers will also
use combinations of the same scarce
resources that other producers use.

 There have been various attempts to
list and categorize those resources
which are statistically significant in travel
and tourism, which are summarized in
Figure 1.1.
Figure 1.1 Significant resources for travel and tourism


                          Scarce resources

                       Labor and enterprise
                          including public
                              goodwill

                               Capital
                 Public provision – Private provision

                                 Land
     Especially its attributes such as scenery and activity basis
             (e.g. beaches, skiable slopes, water areas)

                           Free resources

                     Climate, culture and heritage,
                         Including ‘way of life’
 Tourism is frequently is built upon a basis of free
resources, with (in most economies) a mixture of
publicly and privately used scarce resources

 Thus there is a combination to form what tourists
may perceive as the 'product' they are consuming
and what suppliers are producing

 The terms resource-basis and user-orientation
are used to identify types of tourism product,
particularly destinations and their attractions
Resource-based products tend to be those
 unique attractions created by nature or past
 human activity, where as user-oriented ones
 are more widely spread and are likely to
 have been created specifically for tourist
 use.

Examples of former (resource-basis) could
 be mountains, exotic wildlife in its natural
 habitat, or Roman ruins; and of the latter
 (user-orientation) sports stadia or
 convention centers.
 However, most successful tourism
products are neither entirely type nor the
other:
 for downhill skiing, a mountain requires
specific tourist-oriented capital in investment
runs, lits and lodging as well as the natural
slope and a successful convention center
benefits from being located in a scenically or
culturally interesting place.
    THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS

  THE BASES OF DECISIONS:
  MARKET PRICE OF OUTPUTS, AVAILABLE
  TECHNOLOGY, AND INPUT PRICES

The bases of decision making:
1. The market price of output
2. The techniques of production that are available
3. The prices of inputs
Output price determines potential revenues. The
techniques available tell me how much of each input I
need, and input prices tell me how much they will cost.
Together, the available production techniques and the
prices of inputs determine costs.
   THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS

         Price of output         Production techniques         Input prices




              Determines                          Determine total cost
             total revenue                            and optimal
                                                  method of production



                                  Total revenue
                         -Total cost with optimal method
                                   = Total profit




FIGURE 7.4     Determining the Optimal Method of Production


optimal method of production: The production
method that minimizes cost.
     Resource combinations in Tourism
 Economists term this relationship (resource
combinations) as production function.
Examination of production functions enables
an understanding not only of the total amount of
scarce resources required to make a product, but
also of the alternative ways in which these
resources may be combined.
 Classical theory holds that at a given state of
technology, an ceteris paribus, resource use
depends on the marginal productivity of each
resource, and its price or reward.
      THE PRODUCTION PROCESS
production function or total product
function:

A numerical or mathematical expression
of a relationship between inputs and
outputs.

It shows units of total product as a
function of units of inputs.
            TABLE - Production Function

                 (2)                       (4)
   (1)          TOTAL        (3)        AVERAGE
  LABOR        PRODUCT    MARGINAL      PRODUCT
  UNITS      (SANDWICHE   PRODUCT       OF LABOR
EMPLOYEES         S       OF LABOR   (TOTAL PRODUCT
              PER HOUR)               LABOR UNITS)



   0              0          -             -
   1             10         10            10.0
   2             25         15            12.5
   3             35         10            11.7
   4             40          5            10.0
   5             42          2             8.4
   6             42          0             7.0
    PRODUCTION FUNCTIONS WITH TWO VARIABLE
           FACTORS OF PRODUCTION



 In general, additional capital
increases the productivity of labor.

 Because capital-buildings,
machines, and so on - is of no use
without people to operate it, we
say that capital and labor are
complementary inputs.
         CHOICE OF TECHNOLOGY

TABLE - Inputs Required to Produce 100 Diapers Using
      Alternative Technologies

                    UNITS OF           UNITS OF
 TECHNOLOGY        CAPITAL (K)         LABOR (L)



       A                 2                10
       B                 3                 6
       C                 4                 4
       D                 6                 3
       E                10                 2
   TABLE : Cost-Minimizing Choice Among Alternative Technologies (100
                               Diapers)



                                                               (4)                 (5)
                           (2)               (3)            Cost = (L x PL) + (K x PK)
      (1)               UNITS OF          UNITS OF
                                                               PL = $1              PL = $5
  TECHNOLOGY           CAPITAL (K)        LABOR (L)
                                                               PK = $1              PK = $1


          A                    2               10                 $12                $52
          B                    3                6                   9                 33
          C                    4                4                   8                 24
          D                    6                3                   9                 21
          E                   10                2                  12                 20

Two things determine the cost of production:
(1) technologies that are available and
(2) input prices.
     Profit-maximizing firms will choose the technology that minimizes the cost of production
     given current market input prices.
 Resource combinations in Tourism (c’td)

In travel and tourism generally, some
 resources are unique, or so individual
 that they are irreplaceable.

To offer a tourist experience similar or
 identical to visiting the Grand Canyon
 or Eiffel Tower would be either
 impossible or uneconomic.
 Resources may be used and varied in
combination to bring about a productively efficient
solution.
 So of the analytical techniques involved, such as
neoclassical production theory and activity analysis,
but it is evident at a simple level that some firms in
travel and tourism constantly seek optimal resource
combinations.
 For example, a standard international-style hotel
such as Holiday Inn is likely to operate a property in
the United States or Europe with a staff-to-guest
ratio or perhaps 1:2 or even 2:5.
            Resource combinations
   In a lower-wage Asian country a similar
    property's ratio may be 1:1 or higher.

   The high-wage American or European
    property is likely to have much more
    substantial investment in capital
    equipment, from automatic rather than
    attended elevators to self-service guest
    laundry and labor-saving food production
    equipment.
Some common threads in travel and tourism can
be identified relative to other activities.

 Firstly, tourism at destinations often makes
considerable use of land, or more particularly the
facilities and attributes of land.

 In this respect, 'land' is held to include
landform, flora and fauna, waterspace and
landscape scenery as well as purely special
needs..
 Secondly, much of the travel and the tourism
industry, both at generating areas and
destinations, is relatively labor intensive.

 This is partly historic as traditions in hospitality
and ancillary areas have been based on principles
of domestic service.

 Today's luxury hotel still has a staffing
structure drawn from grand private homes of the
last century, staff-to-room or staff-to-guest ratios
are still seen as an acceptable proxy
measurement of quality.
   These and other sectors of travel and
    tourism frequently stress the
    importance of service, whether in a
    travel agency, on an airline or in a
    souvenir shop.

    Evidence suggests that most tourists
    prefer personnel contact and service
    where possible, rather than
    automated self-service systems.
 Thirdly, tourism calls upon a resource
possessed by tourist themselves, namely time.

 Unlike the purchaser of house hold goods, a
tourist consumer must give up scarce time as
well as money.

 Like money, time has an opportunity cost: that
is the other things which have to be given up in
order to travel; but unlike money which is paid in
exchange for services and goods provided, time
is merely used up.
 Most of this is leisure time which people willingly
use for tourism, as the opportunity cost of other
activities is low, but much of it may reluctantly spent,
especially on mundane (usual-daily) travel and
waiting for public transport.

 When an opportunity costs are sufficiently high,
consumers may take a shorter trip, or non at all, or
expend other resources to reduce time taken.

 Successful sales of transatlantic crossing
Concorde services, together with helicopter
transfers, sold at premium class fares, are proof of
this.
Controlling and Rewarding resource use

 In market economies, and even in most
centrally-planned ones, some form of pricing
mechanism is normal to help to allocate
scarce resources.
 In capitalist economies, resources may be
owned by private individuals or co-
operations, who will provide them for
productive use in exchange, for the best
money price.
 Economists then term such resources factors of
production and the money prices for their use
rewards.
 Thus land provided for productive use earns rental
or royalties, labor earns wages or salaries, capital
earns interest and enterprise earns profit as a
reward.
 In addition, governments may insist on some
control over resource use for social welfare or non-
economic ends – this is most marked in communist
economies, where the state owns some or all
resources itself anyway.
It has frequently been found that factors of
production in travel and tourism do not earn the
best possible reward; in other words that it may be
possible to earn higher rewards in other industries
or that at least there are comparable factors in
other industries earning higher rewards.
                 Why is this?.......

Some of the underlying analysis will be dealt with
more fully in the following chapters, but some
reasons may be briefly identified :
 Tourism and travel has the reputation of being a
relatively clean and pleasant industry in which to
work or invest, so that
 it attracts a greater number of resource suppliers
than a less well-perceived industry, which therefore
keeps reward prices down by competition;
 resource suppliers trade off some monetary
return for nonpecuniary considerations. For
example; a chef may happily work for less money in
pleasant beach resort than he could earn in an
industrial catering job in a big city.
  Setting up in the industry is often seen as
simple and requiring few skills other than the
off-claimed ability to get along with people.
 It is therefore attractive to those retiring
from or leaving other jobs and investments, to
buy into a bar, guest house or travel business
for example.
 If their finances are already sound, income
from travel and tourism is not expected to be
optimal, merely useful.
Destination products are often in
 locations which are little of use to
 other industries, so that competition
 for resource use is minimal and
 hence rewards are low.

In addition to this, many
 governments are extending controls
 over tourism and its use of
 resources, for economic, social and
 environmental reasons.
 The  controls may be direct, such as
straight prohibition on development or
rationing of access to foreign
exchange in order to purchase
imported equipment, or they may be
indirect, such as imposing special
taxation or influencing development
from the demand side.
In any event, governments
 around the world have
 recognized the importance of
 travel and tourism as a human
 activity, and as with any other
 activity, they want to keep it in
 order.
  ...End of
chapter slides

				
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