INTRODUCTION TO

HOSPITALITY ECONOMICS

CHAPTER 1

L
Learning
i
Objectives
Obj ti
This chapter will help you to:

Understand the core terms and concepts used in business

economics.

Appreciate the nature of a firms production decisions with

respect to what to produce, how to produce and for whom to
produce.

Recognize the different objectives which different firms may

pursue and the consequent impact on price and output
decisions.

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Meaning of Economics

Economics is defined as a social science that study

the behavior of the society of how they make use of
limited factors of production to satisfy unlimited
human wants

Factors of production (land, labor, capital and

entrepreneur)
Human wants (goods and services)

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Factors of production

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H
Human
N
Needs
d
All economic questions arise because we
want more than we get

Peaceful and secure world

Clean air, lakes, and rivers
Long and healthy lives
Good schools, colleges, and universities
S
Spacious
i
and
d comfortable
f t bl homes
h
Time with our friends

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Di i i
Division
off Economics
E
i
Microeconomics Environment

deals with the operation of the firm in its

immediate market
involves determination of prices, revenues,
costs, employment, etc

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Division of Economics
Macroeconomics Environment

deals with the general economic conditions of

the larger
g economy
y of which each firm forms
a part
involves the impact of political, legal and
economic decisions, both nationally and
internationally.

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Resource Allocation
Economics is concerned with the efficient
allocation of scarce resources. When
purchasing raw materials, employing
labour
and
undertaking
investment
decisions, the manager is involved in
resource allocation.

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Economic Questions
Q estions

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Scarcity, Choice, and Opportunity

Cost

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Scarcity
Scarcity is the problem of infinite human
needs and wants, in a world of finite
resources. In other words, society does not
have sufficient productive resources to fulfill
those wants and needs; trade-offs are
made of one good against others.

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O
Opportunity
t it Cost
C t
The opportunity cost of any activity is what we
give up when we make a choice.
choice In other
words, it is the loss of the opportunity to pursue
the most attractive alternative given the same
time and resources.

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P d ti
Production
Possibility
P
ibilit Curve
C
A production possibility curve is a graph that
shows all of the combinations of goods and
services that can be produced if all of
societys resources are used efficiently.
efficiently

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The Prod
Production
ction Possibility
Possibilit Frontier
The production
possibility
p
y frontier curve
has a negative slope,
which indicates a tradeoff
ff between
b t
producing
d i
one good or another.

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The Prod
Production
ction Possibility
Possibilit Frontier

Points inside of the curve

are inefficient.

At point H, resources are either

unemployed,
l
d or are used
d
inefficiently.

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The Prod
Production
ction Possibility
Possibilit Frontier

Point F is desirable
because it y
yields more
of both goods, but it is
not attainable given the
amountt off resources
available in the
economy.
economy

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The Production Possibility Frontier

Point C is one of the

possible combinations of
p
goods produced when
resources are fully and
efficiently
ffi i tl employed.
l
d

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The Prod
Production
ction Possibility
Possibilit Frontier

A move along the curve

illustrates the concept
p of
opportunity cost.
From point D, an increase
the production of capital
goods requires a
d
decrease
iin th
the amountt
of consumer goods.

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Economic Growth
Gro th
Economic growth is an increase
in the total output of the
economy It occurs when a
economy.
society acquires new resources,
or when it learns to produce
more using
i
existing
i ti
resources.
The main sources of economic
growth are capital
g
p
accumulation and
technological advances.

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Constraints to Optimization
Demand

1.

Can not maximize profit with a limit on demand.

Fix: Create additional demand.

Geography

2.

There are a limited number of resources available for tourist

enjoyment

Fix: Build? Create demand for new sites (UNESCO)?

Technical and/or Environmental Constraints

3.

Looked at together because technology can overcome

environmental issues. True?

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C
Constraints
t i t to
t Optimization
O ti i ti
Time Constraints

4.

How much vacation time do people have?

Indivisibilities

5.

Not separable into parts; Incapable of being divided

Legal Constraints

6.

Actions of CVBs,, zoning,

g, environmental laws

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C
Constraints
t i t to
t Optimization
O ti i ti
Self-imposed constraints

7.

Conflicting
gg
goals need to be reconciled

Lack of knowledge

8.

Ignorance, lack of research, acceptance of status quo

Limits on Supportive Resources

9.

Managerial talent, workers, construction material, social

capital

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END OF CHAPTER 1