Introduction to Economics of Tourism

1. Introduction to Economics of Tourism Assistant Professor Chanin Yoopetch

2. Course Objectives • After successful completion of this course, students will be able to; • Understand the concepts of principles of economics. • Understand the factors affecting tourism at the macroeconomic and microeconomic levels. • Understand the relationship between travel and tourism-related organizations and economic environments.

3. Books • Tribe, John(2005), The Economics of Recreation, Leisure & Tourism, Boston : Elsevier • Mankiw, N. Gregory(1998), Principles of Economics, Fort Worth, Tex: The Dryden Press (better to find the newest version)

4. Assignments • Two group assignments/ one before midterm and one before final exam. • 1st assignment • Choose two countries from http://www.wttc.org/eng/Tourism_Research/Tourism_Economic_Research/Country_Reports/ then • compare and contrast the economic impact of travel and tourism of the two countries • Assume that you are a manager of hotel chains operating in those two countries, which country should you expand your hotel/resort business operations.

5. 2nd assignment • Select the organizations in Thailand (e.g. hotels, spa, etc.) • Analysis • How economic factors affect tourism-related organizations? • How should they prepare for political, social, and economic crisis? • How should they solve economic problems? • Progress report/Report/Presentation

6. Economic Impact of Tourism • Power of tourism to the economy : The case of Florida(2007)

7. Overview of Tourism and Economics • Effective tourism management needs economic understanding. • Economic growth relies on tourism industry. • Understand economy helps tourism-related organizations effectively manage their businesses and activities. • Exchange rate (Ex. Weak Yen helps boost tourism in Japan.) • Economic situations in other countries. (Ex. Poor Thai economy leads to more visitors? Political situations?) • etc.

8. World News: Violence Deals a Blow to Thai EconomyJames Hookway. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 8, 2008. pg. A.14 • Thailand is a global production hub for several multinationals, including Toyota Motor Co. and Ford Motor Co. The country had hoped to attract 15 million tourists this year. Tourist spending accounts for 6% of gross domestic product; 12% if related services are included.

9. Sars' long shadowShawn W Crispin. Far Eastern Economic Review. Hong Kong: Jun 5, 2003. Vol. 166, Iss. 22; pg. 42 • Although Thailand has thus far been spared the Severe Acute Respiratory Syndrome, or SARS, outbreak, the Thai economy is reeling from the contagion nonetheless. • Thailand's foreign-currency-spinning tourism industry has been particularly hard-hit. Inbound tourism fell by 43% in April, with average hotel-occupancy falling to a record low of 25%. • There are indications the rot is now spreading through the broader economy. SARS fears are weighing on consumer confidence, which waned in both March and April, the first consecutive monthly decline since 2001.

10. 200,000 jobs at risk as tourists cancel bookings(Bangkok Post, April 2009)) • Apichart Sankary, president of the Association of Thai Travel Agents, said that television images beamed around the world of troops firing volleys of gunfire to disperse protesters had alarmed potential visitors. •  "Layoffs are inevitable. We may lose up to 200,000 people this year if the situation is not resolved," he said. • Thailand's tourism industry accounts for 5% of gross domestic product and employs two million people, or up to 7% of the country's total workforce. • In its latest report released this month, the World Bank said Thailand's economy is expected to contract 2.7% this year from a growth of 2.6% in 2008.

11. Learning outcomes • By the end of this session students will be able to: • understand the scope of recreation, leisure and tourism and their interrelationship • explain the basic economic concerns of scarcity, choice and opportunity costs • outline the allocation of resources in different economic systems • explain the methodology of economics • understand the use of models in economics • understand the use of economics to analyse issues in recreation, leisure and tourism • access sources of information

12. Important Terms To Know • SCARCITY: limited availability of things that we desire (not to be confused with shortage). • UTILITY: the benefits (satisfaction or well-being) individuals receive from owning or consuming goods and services. • RESOURCES: factors of production (inputs) that are used to produce the goods and services that give us utility. • ECONOMIZING PROBLEM: living in a world in which our material wants are unlimited while the means to produce goods that satisfy our wants are limited. Deciding how to use our scarce resources to satisfy some, but not all, of our wants.

13. Important Terms To Know • OPPORTUNITY COST: the highest valued benefits that must be given up when using a resource in a particular way. The highest valued alternative that is unavailable because a resource is used in some other way. • HUMAN RESOURCES: the quantity and quality of the labor force as a contributor to the production of goods and services. • CAPITAL GOODS: human-made, tangible resources used to produce goods. For example, factories, machines, and tools. (Not money or financial assets.) • EFFICIENCY: producing something at the lowest possible opportunity cost. Producing those goods that give us the most utility relative to what has to be given up.

14. Important Terms To Know • Leisure • discretionary time. • Recreation • pursuits undertaken in leisure time. • Tourism • visiting for at least one night for leisure and holiday, business and professional or other tourism purposes. • Economic problem • scarcity and choice. • Leisure and tourism sector organizations • organizations producing goods and services for use in leisure time, and organizations seeking to influence the use of leisure time.

15. Important Terms To Know • Microeconomics • study of household and firm’s behaviour • Macroeconomics • study of whole economy. • Marginal analysis • study of effects of one extra unit. Ex. Phone call (1st min 5 baht, and after that 1 baht/min) • Positive statement • based on fact. • Normative statement • based on opinion.

16. Important Terms To Know • Ceteris paribus*** • other things remaining unchanged

17. The word Economy . . . comes from a Greek word for “One who manages a household.”

18. A household and an economy face many... Decisions? Decisions? Decisions? Decisions? Decisions?

19. ? ? ? ? ? ? Decisions ? • Who will work? • What to produce? • What resources to use? • Who will we sell it to?

20. Scarcity... … means that society has less to offer than people wish to have. Managing society’s resources is important because resources are scarce.

21. Economics is the study of how society manages its scarce resources • Economists study. . . …how people make decisions. ...how people interact with each other.(Businesses & Customers) …the forces and trends (the changes in exchange rate, oil prices, or interest rate) that affect the economy as a whole.

22. Ten Principles of Economics:I. How People Make Decisions In a world of scarcity, every choice is a tradeoff. Almost all resources can be used many different ways. • People face tradeoffs. • The cost of something is what you give up to get it. • Rational people think at the margin. Ex. Airline has 30 empty seats before taking off. (MC and MB) • People respond to incentives.

23. I. How People Make Decisions1. People face tradeoffs To get one thing, we usually have to give up another thing. Guns vs. Butter Food vs. Clothing Leisure Time vs. Work Efficiency and Equity (With limited resources, can you have them all in the same time?)

24. I. How People Make Decisions1. People face tradeoffs • Efficiency means . . . …getting the most you can from scarce resources. • Equity means . . . …benefits of resources are distributed fairly among society.

25. I. How People Make Decisions2. The Cost of Something Is What You Give Up to Get It • Decisions require comparing costs and benefits of alternatives • Going to college vs. going to work • Opportunity Costiswhat you give up from one alternative (choice) to get what you want (from another choice) • Limited resources (Entrepreneurial skills/Capital/Land/) of Government and businesses

26. Who has higher opportunity cost? • For teaching ICTM 214 Economics for Tourism • Justin Timberlake(JT) and Chanin Yoopetch(CY)? • So, based on opportunity cost, who should teach the course?

27. Production Possibility Frontier used to explain Opportunity cost (Mutually Exclusive) Money for Summer trip Money for Summer School

28. I. How People Make Decisions3. Rational People Think at the Margin Margin = getting more than what you invest. (ex. Buying life insurance or travel insurance). • Marginal changesaresmall, incremental adjustments to an existing plan of action. • Comparing benefits and costs of a critical choice • Marginal Benefits => MB • To produce one more unit, what is additional benefit? • Marginal Costs => MC • To produce one more unit, what is additional cost?

29. I. How People Make Decisions4. People Respond to Incentives • Marginal changes in costs or benefits from decisions motivate people to respond. • Decision to choose one good over another occurs when MB > MC. • These costs and benefits can be both monetary or nonmonetary in nature.

30. Ten Principles of Economics:II. How People Interact Why do people need to trade with others? • Trade can make everyone better off. • Markets are usually a good way to organize economic activity. • Government can sometimes improve market outcomes.

31. II. How People Interact5. Trade Can Make Everyone Better Off • People have different tastes and preferences, and incur different opportunity costs in the production of goods. • Individuals gain from their ability to trade with others. • The assumption that people behave rationally suggests that voluntary trade will not occur unless both parties expect to gain from the transaction. • Competition results in gains from trading. • Trade allows one to specialize in what they do best.

32. II. How People Interact6. Markets Are Usually a Good Way to Organize Economic Activity • In a Market Economy, households and business firms determine what to buy, who to work for, who to hire and what to produce. • What is Market Economy? • It is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. • Interaction between household and business is as if by an “invisible hand.”

33. II. How People Interact6. Markets Are Usually a Good Way to Organize Economic Activity • What is “an invisible hand”? • Households and firms interact in market as if they are guided by “invisible hand” that leads them to desirable market outcomes.

34. II. How People Interact7. Governments Can Sometimes Improve Market Outcomes • When the market fails (breaks down) government intervenes to • promote Efficiency - Gov’t help improve employment when economic crisis occurs. • promote Equity -Gov’t adding more money into economy • Market failure results in inefficiency - failure of “invisible hand.” • What is Market failure? • A situation in which a market on its own fails to allocate resources efficiently.(Thai Economy)

35. II. How People Interact7. Governments Can Sometimes Improve Market Outcomes • Market failure may be the cause of anexternality which is the impact of one person’s actions on the well-being of another person. (example: pollution-Gov’t intervenes through environmental laws) • Market poweris the ability of a single person to unduly influence market prices. • A single well owner in the village. He has market power over the sales of water. (Monopoly)

36. Ten Principles of Economics:III. How the Economy as a Whole Works • A country’s standard of living depends on its ability to produce goods and services. • Prices rise when the government prints too much money. • Society faces a short-run tradeoff between inflation and unemployment.

37. III. How the Economy as a Whole Works8. Standard of living depends on a country’s production. • Standard of Living may be measured in different ways (e.g. personal income or total market value of a nations production.) • Differences in standard of living between countries or even states is attributable to the productivity of the country or state. • Normally, standard of living represents average spending of people in a certain country.

38. III. How the Economy as a Whole Works8. Standard of living depends on a country’s production. • Productivity is the amount of goods and services produced from different resources Productivity => Standard of Living

39. III. How the Economy as a Whole Works9. Prices Rise When The Government Prints Too Much Money • Prices on average rise over time when the quantity of money increases faster than the increase in output. • Inflationis an increase in the overall level of prices in the economy. • One cause of inflation is the growth in the quantity of money.

40. III. How the Economy as a Whole Works10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment A Short-Run Tradeoff. You Choose. Inflation Unemployment

41. The Relationship of Economics and Tourism

42. Definition and scope of recreation, leisure and tourism • Leisure = discretionary time • Recreation = pursuits undertaken in leisure time • Tourism = visiting for at least one night for leisure and holiday, business and professional or other tourism purposes

43. Definition, scope and methodology of economics • The nature of economics • Allocative mechanisms (Limited resources vs. unlimited wants) • Free market economy • resources allocated through price system. • Centrally planned economy • resources allocated by planning officials. • Mixed economy • resources allocated through free market and planning authorities.

44. Definition, scope and methodology of economics • The methodology of economics • Economics is social science. • The ‘science’ of social science • Science of economics is to develop a body of prinicples • Economic principles try to explain the behaviour of households and firms in the economy.

45. Two common aspects of science in Economics • One needs to distinguish between positive and normative statements. • Positive statements are those which can be tested by an appeal to the facts. • Normative statements are those of opinion and therefore cannot be tested by an appeal of the facts.

46. Examples of positive statements • A rise in consumer incomes will lead to a rise in the demand for new cars. • A fall in the exchange rate will lead to an increase in exports overseas. • More competition in markets can lead to lower prices for consumers. • If the government raises the tax on beer, this will lead to a fall in profits of the brewers. • A reduction in income tax will improve the incentives of the unemployed to search for work. • A rise in average temperatures will increase the demand for chicken. • Poverty in the UK has increased because of the fast growth of executive pay.

47. Example of normative statements • The level of duty on petrol is too unfair and unfairly penalizes motorists. • The government should increase the national minimum wage to 250 baht per day in order to reduce relative poverty. • The government is right to introduce a ban on smoking in public places. • The retirement age should be raised to 75 to combat the effects of our ageing population. • The government ought to provide financial subsidies to companies manufacturing and developing wind farm technology.

48. The ‘social’ of social science • Social sciences include economics, sociology and psychology, while natural sciences are physics and chemistry etc. • Economic models • Models are used to describe the relationship of economic variables • Y= C+ I + G + (X-M) • Devaluation of Thai baht increases the demand for products and medical services of Thailand

49. Models are generally simplified abstractions of the real world. • Two components of models are • Assumptions are made which build the foundation for the model. (Ceteris Paribus- other things being held constant) • Implications or outcomes are predicted by the working of the model. (the prediction of economic growth for the year 2009 is -3%)

50. Scientific testing of theories • Hypothesis • A tentative explanation for an observation, phenomenon, or scientific problem that can be tested by further investigation. • consists either of a suggested explanation for an observable phenomenon or of a reasoned proposal predicting a possible causal correlation among multiple phenomena. • Theory is • a set of statements or principles devised to explain a group of facts or phenomena, especially one that has been repeatedly tested or is widely accepted and can be used to make predictions about natural phenomena. • the analysis of a set of facts in their relation to one another