The tourist supply. Production and Costs

Economics Topic 4

Tourist supply

is the quantity of a good or service that you want to supply at different prices and that have an exclusively tourist character. It is made up of accomodation, travel agencies and transport services

Tourist supply, complementary supply

Formed by those goods that, without being exclusive to tourism, are demanded by tourists and complement the final tourism product e.g catering services, cultural, sporting and recreational services

(Tourism supply). The law of supply says that a relationship exists

Positive between price and quantity supplied. At a higher price, producers want to sell more to make a higher profit.

Supply Function Formula

Ox= f(Px, Pfp, T, Pbr,O)

Supply Function

a mathematical relation that shows the relationship between the quantity of goods supplyed, its price and other variables that influence production decisions (supply curve)

Px

price of good x in question

Py

price or cost of productive factors

T

Technology

Pbr

Price of related goods

O

Other factors such as climatic, political characteristics

Technology (T)

When there are technological improvements, this translates into a reduction in production costs, which leads to an increase in supply. Any improvement in technology will allow a quantity to be produced and sold at a lower price

In the tourist supply, where have technologicl advances been seen?

in the field of infrastructure and faster and safer means of transport, which have allowed to reach where it was unthinkable before, favoring so-called mass tourism

The prices of the factors of production (P,fp)

The productive factors are the resources used in the production of goods and services; the lower the price of these, the cheaper it will be to produce a certain good, and therefore the higher the profit the seller can get. The supplier will be willing to increase his supply for each price level, and conversely, with an increase in production costs, he will reduce the supply

How is tourism a very labour-intensive activity?

An increase in wages has a strong effect on the supply side, reducing the supply of goods and services

Price of related goods (Pbr)

The lower the prices of the related products, the higher the supply of the good in question will be, since it is more attractive to supply it, as its demand will increase

Example of Pbr

If the price of holiday rentals rises sharply, it’s possible that the same company concentrates all its efforts on producing this good and, for example, reduces the supply of hotel rooms that are less profitable

Other aspects (O)

Climate, war conflicts in areas will affect supply

How is the tourist supply very complex?

made up of independent sectors (e.g., accommodation, catering, and congress organisers), but tourists perceive it as one overall product (e.g., a trip to Tunisia).

List the characteristics of tourist supply

attraction, natural resources, cultural resources, resources linked to technology, resources linked to the practice of a specific recreational activity, event resources

The main goods supplyed to tourists are

accomodation, transportation, creation and marketing of tourism goods, provision of recreational activities, events and tourist attractions, peripheral services of the private sector, peripheral services of the public sector, assistance services for tourism providers

Price elasticity of supply

calculates the amount by which the quantity will vary when the price is altered. Always takes positive values, because there is a positive relationship between the price and quantity supplied. Normally, the price is higher in the long run than in the short run, e.g hotel vacancies cannot be expanded overnight

Example of high price elasticity of supply

Charter flights are supplied at very low prices, a slight drop in price is enough for the providers to decide not to supply seats because their profitability is not assured

Companies produce in order to obtain

maximum profit

How do companies obtain maximum profit

They will have to know its revenue and costs to decide the production volume that generates the max profit.

In the short run some factors (land, labour, capital) are..

fixed

The short run is defined as

the period in which the available quantity of some factors of production, which are called fixed factors, remain unchanged

In the long run, factors of production (facilities, buildings) are…

variable

The long run is defined as

one in which the entrepreneur can vary all the factors of production, there are no fixed factors

Fixed factors

do not vary with the level of production, they remain constant in the short run e.g. buildings, premises

Variable production factors

vary with the level of production e.g. if i have more customers, I hire more waiters

Explain production

the transformation of raw materials into products and services capable of satisfying needs

The production function shows

What is the maximum production that a company can obtain with different quantities of productive factors, given a certain technology

Production Function Formula

PT= f(L,K,Rn,T)

PT= f(L,K,Rn,T)- L

Labour, the work

PT= f(L,K,Rn,T)- K

the capital

PT= f(L,K,Rn,T)-Rn

Natural resources

PT= f(L,K,Rn,T)- T

the technology incorporated in the production process

Total Product

the total amount of product obtained, for different amounts of variable factors, given a technology and fixed factors

Average Product of labour formula

PMe= PT/L- the result of dividing the total product by the number of labour units used

What is the average product of labour used for?

It is used to measure the performance of the productive factors, and it’s useful to make comparisons between different companies within the same sector

Marginal Product

measures how total output changes as one more unit of variable factor is added

Law of diminishing marginal returns

The shape of the marginal product curve explains the law

Short-run costs

total costs, fixed costs and variable costs

Long- run costs

no fixed costs, all costs are variable costs

A fixed cost

is the one that does not depend on the quantity produced. It is the cost of the fixed factor: rents, insurance

A variable cost

is the one that depends on the quantity produced. It is the cost of the variable factor: labour, raw materials, the higher the production, the higher the variable costs

The total cost

of producing a given quantity is the sum of the fixed and variable cost

Total cost formula

CT= CF+CV- total cost= fixed cost+ variable cost

The average total cost (CTME) is defined as

total cost divided by the number of units produced

Average total cost formula

Average total cost= total cost of production/ quantity of units produced

Knowing the average total cost allows the company

to know what it costs on average to produce each unit, which is important when calculating the price per unit

The ATC varies when

the level of production varies

How is the ATC shaped on a graph

U-Shaped

The Marginal Cost (CMg) measures

the change in total cost when we increase the product quantity by 1 unit. The marginal cost of an activity is the cost incurred to obtain an additional unit

Marginal Cost Formula

change in total cost/ change in quantity

A situation in which a company reduces its production costs as it expands is called

economy increasing of scale

How do companies earn revenue?

from the sale of their products

How is Total Income (IT) calculated

by multiplying the selling price (P) by the quantity of products sold (q)- P x q

Profit is

the difference between total revenue (TR) and total costs (TC)