Overseas Holiday Costs: Price Elasticity of Demand

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Overseas Holidays: Demand, Prices, and Revenue

Overseas holidays take up the greater part of travel agent bookings; the year 2011 experienced a great amount of holidays overseas taken by the United Kingdom’s flat line since 2008. The demand for sales of overseas tourism in the last five years was low because of various reasons or factors.

For instance, the lack of growth in the last five year was enhanced by such factors as “Eyjafjallajokull” volcano, which caused the airspace to be closed up, thus, leading to the reduction in demand sales for holidays due to the negative effects within the market. In addition, there was a downgrade in forecast of GDP growth in the Bank of England, which was noted to be approximately one percent to two percent.

The decrease in the demand for overseas holidays in the last five years was also due to domestic events that happened during the peak summer period. For instance, there were Olympic Games in August and the UEFA, European Football Championship in June.

It is revealed that domestic holidays declined from the year 2009 peak point remained at sixty-one percent of all holidays that were in use in 2010. Therefore, due to the decrease in demand of holidays that was experienced in the last five years, the prices were also affected, they had to be reduced in order to attract more holiday travelers. As a result, the sellers’ revenues were also influenced negatively because they declined.

Research shows that the percentage of demand on holidays was a result of over protection on holidays and a small upturn in the package sector that raised agent`s share of the market. Short breaks were greatly affected by the recession that led to their abandonment by consumers. This trend caused a negative impact on independent holiday volume.

Staycation and Its Popularity

A staycation is a special type of vacation in which individuals known as staycationers remain at home rather than travel away to have some rest. The main purpose of a staycation is to help people rest from their day-to-day activities without having to take a trip far away from home (Rees 2011, p.89).

Staycations have become popular currently because they are readily affordable by every person who needs a vacation but lacks finances or sufficient time. In addition, it is the best vacation for those individuals who do not like to experience travel difficulties such as delays among other shortcomings. Staycations have become popular because it is a person’s choice where to go. In a staycation, there are no difficulties in packing and unpacking of luggage. Generally, staycations have become popular because they are good time savers.

This is because most people’s schedules are so tight and, therefore, finding time for oneself becomes an issue. Therefore, with staycation, people can save time that is spent on traveling by checking in the nearest resort where they can get out of their daily activities. It saves money since most vacations are extremely expensive. Staycation requires creativity rather than a lot of money in order for one to have fun. Staycations are also safe, specialized and simple.

Determinants of the Relative Prices of Staycation and Vacations

Relative price is the price of a product or service in terms of another. Therefore, the relative prices of staycation and vacation are determined by the prices spent on vacation to those spent on staycation. This implies that a person may decide to have a staycation because of lack of enough money to go for a normal vacation, which is quite demanding in terms of money.

Income Elasticity of Demand in Explaining the Effects of the Recession on the Demand for Holidays

Income elasticity of demand is used to quantify the association between a change in amount demanded and a change in revenue. Demand for holidays is extremely price elastic.

This means that as the prices of holidays goes up, it leads to a decline in demand. For instance, during the declines in the number of demand for holidays that were less than the equivalent reductions in volume, average expenditure on oversees continued to increase across the period. Examples of overseas expenditures involve airfares, sea fares, tunnel, as well as train fares.

Therefore, due to this increase in travel expenditures using the concept of income elasticity of demand, the demand for holidays reduced at a higher rate because a considerable number of people choose to have a staycation, which is quite affordable rather than going for long vacations far away from home.

The major cause of recession involves the short breaks that have been unreasonably affected. This is because a significant number of customers are more likely to abandon the short breaks holidays due to an increase in travel expenditures more than the long main holidays.

As a result, this could lead to the elimination of shorter value oversea trips from the equation to a higher extent than long holidays. The capacity concerning the short breaks have been thoughtfully redirected towards high value commodities.

Therefore, higher affluence has greatly correlated with the likelihood to take holidays overseas, nevertheless, the rich customers have been the least likely to change their behaviors concerning going for holidays despite the occurrence of recession, whereas the less fortunate have been more likely to give up the issue concerning the overseas holiday market.

Some of them either resort to other travel agencies or simply give up the idea of holidays completely. As a result, it has reduced the average expenditure on the influence of the lower spending sections. This implies, therefore, that change in price expenditure of travel agencies led to change in demand for holidays for majority of individuals who cannot afford to pay.

Importance of the Cross-Price Elasticity of Demand Concept

Cross elasticity of demand is the measure of responsiveness of the demand for a product due to a change in the price of another product. Elasticity of demand is important because if an organization can estimate cross elasticity of demand, then it stands a good chance of evaluating the effect of pricing strategies of their competitors.

Type of Market Structure That Exists for Package Holidays

Most organizations base on those features that influence the nature of competition and pricing. For package holidays, there is the existence of the perfect competition market structure. This is a market structure that involves unrestricted contestability. This implies that any is free to join such a market because there are no obstacles that hinder a person or an organization to join the market structure.

For instance, there are an unrestricted number of manufacturers and purchasers that involve an ideal elastic demand curve. Therefore, perfect competition exists within the market for package holidays because businesses dealing with travelling are open and have no restrictions for entry and exit, there are also a significant number of firms that have been developed under this market thus they produce the same products and services which are mostly transportation services.

This market structure within the market of package holidays provides effective and efficient information and skills that are required through various means such as the internet so as to make it easier for travelers to have access to the information anytime and anywhere they wish. The firms under this market structure are price receivers making their demand curve to be a perfectly elastic curve.

The Rationale for the Merger Activity in Recent Years

The motivation for the merger activity was to help in expanding the travel agency. For instance, through this activity that has taken place during the recent years, there was introduction of the United Kingdom first fair trade holiday as well as introduction of internet across the broader travel industry, which acted as the driving force for the innovation and for the merging activity in recent years. It is noted that a considerable number of people from various places have made their bookings through the internet.

The relevant costs include variable costs because they tend to vary with output. This implies that these costs have a constant increase rate that is relative to labor and capital. For instance, when the demand for holidays reduces, the costs included in the travel expenditures also reduce, while the increase in demand for holidays also increases the prices.

Reference

Rees, T 2011, Travel agents, senior travel and tourism analyst, Prentice Hall, London.

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