Essay Example on Terrorism Impact on Global Travel and Hospitality Industry

Introduction

The travel industry is one of the major generators of revenue in most countries. It is a sector that involves the coordination of the traveling of people from one place to another for leisure. However, terrorist activities have adversely affected diverse economic sectors due to the effect they have in creating fear among the consumers. The hospitality industry has suffered most from the terrorist acts due to the tendency of terrorists to target people from the western world, who are the majority consumers. Whenever terrorist attacks occur, or travel advisories are given, people will become very cautious to travel, especially during the holiday season. The possibility of losing life or suffering injuries because of terrorism deters travelers and tourists from taking vacations. Consequently, revenue generation by traveling companies has been decreasing exponentially over the years as the fear of terrorism increases. The decrease of the revenue generated by the traveling companies has detrimental economic effects due to the loss of jobs in travel and complementary industries, and reduced tax collection from the sector. Accordingly, an analysis of terrorism in causing revenue realized by the travel industry to decrease and the reactions that should be employed to enhance the revenue has been undertaken in this research paper.

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Analysis and Solution

The effect of terrorism in causing the revenue generated by the hospitality industry to decrease can be analyzed from the perspective of supply and demand concept. The concept of supply and demand is a critical economic theory due to the role it plays in demonstrating how the supply and demand of a given service or good can cause the price to increase or decrease. The law of supply and demand provides that an increase in supply has an effect of causing the equilibrium price to decrease, while a decrease causes the equilibrium price to increase (Marshall, 2010). However, an increase in demand causes the equilibrium price to increase, while a decrease in demand causes the equilibrium price to decrease (Gans, King, & Mankiw, 2011). The equilibrium price means the point at which the supply and demand are equal, which is the market demand and market supply (Marshall, 2010). This concept of supply and demand can be demonstrated using the curves below.

The exploitation of the economic systems concept has the potential of helping hospitality firms to enhance the revenue generation. The concept of economic systems implies the means used by governments to trade services and goods and distribute resources (Gottlieb, Tilly, & Shorter, 2014). The economic systems are employed to control the factors of production that include capital, physical resources, entrepreneur, and labor. The four different types of economic systems are command system, market system, socialism system, and the mixed system (Gottlieb, Tilly, & Shorter, 2014).

The market economic system is characterized by a free market in which the government is not involved in controlling resources but follows the law of supply and demand to set the market price. In contrast, a command economic system has a centralized government power that controls economic activities (Gottlieb, Tilly, & Shorter, 2014). The mixed economy is characterized by a mixture of the market and command characteristics in which regulatory oversight is strong but direct control of economic activities is left to entrepreneurs. Lastly, the socialist economic system is one in which the production of goods and services is intended for consumption rather than profit generation (Gottlieb, Tilly, & Shorter, 2014). Accordingly, the economic system that should be used to revive revenue generation by hospitality firms is the mixed economic system.

The employment of the mixed economic system has an effect of introducing strong regulations and control by the government that will see firms entering the market facing stringent procedural regulations. Consequently, the hospitality industry will experience an oligopoly type of market structure. Indeed, there are four types of market structures that include perfect competition market structure, monopolistic market structure, oligopoly market structure and the monopoly market structure. A perfect competition market structure is characterized by a huge number of small businesses competing against each other (Stackelberg, Bazin, Urch, & Hill, 2011).

Similarly, firms operating in a perfect completion market offer homogenous products that eliminate individual firms the power of setting prices. A monopolistic competition market structure is similar to the perfect competition but firm sells differentiated products, which gives them the power of setting prices. In contrast, an oligopoly market structure is characterized by a small number but big firms dominating the market (Stackelberg, Bazin, Urch, & Hill, 2011). One critical characteristic of an oligopoly market structure is the entry and exit barrier. Lastly, a monopoly market structure is dominated by a single firm that gives it a strong market power since consumers lack an alternative.

Accordingly, the use of the market mix economic system will give rise to the oligopoly market structure due to the regulatory barriers of entering the market. Firms willing to enter the hospitality industry will face hindrance due to the strong regulations imposed by governments across the world. Equally, the strong market oversight regulations under the mix-market economic system have an effect of increasing the production cost. The production cost is composed of the fixed cost and the variable cost. A variable cost is a cost that changes as the units produced changes. In contrast, the fixed cost does not vary with the change in production volume. Accordingly, the introduction of more regulations under the mix-market economic system means that the variable cost per unit will increase. An increase in variable cost has an effect of increasing the marginal cost.

A marginal cost implies a change in total production cost as the production quantity adjusts by one unit (Mankiw, 2012). An increase in total cost means that the average cost will increase. Thus, the prices of travel services will increase to cover increased average cost per service, which has an elasticity effect. Elasticity means the extent to which demand changes as prices changes. An increase in prices of hospitality services has a high potential of resulting in inelastic demand since it is not an essential commodity. Inelastic demand is an elasticity that experiences drastic demand change as price change while elastic demand is one that has less demand change. Consequently, firms will be forced to reduce the volume of services they offer to be cautious of marginal cost increment. The reduction in the supply of the travel services will see the equilibrium price increase as reflected in the law of supply and demand, which will cure current declining revenue in the travel industry.

Conclusion

Microeconomic concepts are essential in resolving economic problems faced by the individual firms in a given industry. The analysis undertaken depicts that the falling revenue faced by the travel industry is derived from decreasing demand for travel services during vacation periods due to fear of terrorism. This aspect is demonstrated from the application of the supply and demand concept in reflecting the change of equilibrium price as any of the variables changes. Consequently, the concept of economic systems has been employed to resolve the problem due to its influence on factors of production. The use of mix-market economic system gives rise to an oligopoly market structure due to its influence on production cost and demand elasticity. Accordingly, the supply of travel services will decrease with oligopoly market structure and sensitive marginal cost, which helps in increasing the prices.

References

Gans, J. S., King, S. P., & Mankiw, N. G. (2011). Principles of microeconomics. South Melbourne, Vic: Cengage Learning.

Gottlieb, M., Tilly, C., & Shorter, E. (2014). A Theory of Economic Systems. Saint Louis: Elsevier Science.

Mankiw, N. G. (2012). Principles of microeconomics. Mason, OH: South-Western Cengage Learning.

Marshall, A. (2010). Principles of economics. New York: Cosimo.

Stackelberg, H., Bazin, D., Urch, L., & Hill, R. (2011). Market structure and equilibrium. New York: Springer.