| Introduction: | | | | the other modes, this results into an increase in |
| Economic policies including fiscal and monetary | | | | the demand for these modes of transport and |
| policies will affect the transport industry, in the | | | | contribute toi the growth of the travel industry. |
| United States the modes of transport include air, | | | | Wages: |
| road, rail and water transport networks, the | | | | Wage inequalities is also evident in the travel |
| transport industry provides 7% of total | | | | industry, some modes of transport will have |
| employment in the United States and a high | | | | higher wages than others resulting into increased |
| percentage of GDP levels. After September 11 | | | | labor force supply, however other modes will |
| the travel industry experienced a decline in | | | | have lower wage rages and therefore less labor |
| performance. | | | | supply, those with lower wage rates are forced |
| Supply and demand: | | | | to increase their wages resulting into increased |
| The price in the travel industry is determined by | | | | costs of production. Wage inequality therefore |
| market forces, the market demand and supply | | | | affects the travel industry in a way that in some |
| will determine the price of services offered, the | | | | modes and regions we have insufficient supply of |
| market will adjust accordingly as a result of shifts | | | | labor. |
| and price elasticity of the services offered. | | | | Fiscal and monetary policy: |
| An upward shift in the demand curve in the travel | | | | The government and monetary policy makers will |
| industry will lead to an increase in the equilibrium | | | | make decisions that may affect the travel |
| price; an upward shift in the demand curve may | | | | industry, these include increase or decrease in |
| be caused by increased tourism in the country. A | | | | taxes, increased government expenditure and rise |
| downward shift in the demand curve in the travel | | | | or fall in interest rates, we anlyse the policy |
| industry will lead to decline in the equilibrium price. | | | | measures and their effect on the travel industry: |
| A downward shift in the demand curve may be | | | | Fiscal policies: |
| caused by a national disaster example after | | | | These are policies by the government and they |
| September 11 where tourism declined; the | | | | include expenditure and taxation, an increase in |
| diagram below shows the effect of shift in the | | | | government spending on transport infrastructure |
| demand curve: | | | | will have a positive impact on the travel industry, |
| From the above chart movement from demand | | | | this is because improved transport infrastructure |
| curve 0 to demand curve 1 shows an upward | | | | will enable easier accessibility and therefore benefit |
| shift in the demand curve, this upward shifts | | | | the travel industry, reduced spending on |
| causes the equilibrium price to rise. The | | | | infrastructure will therefore have negative impacts |
| movement from demand curve 0 to demand | | | | on the travel industry. |
| curve 2 shows a downward shift in the demand | | | | Governments will finance their spending through |
| curve, this leads to a decline in the equilibrium | | | | revenue collected by means of tax, increased |
| price. | | | | income and other forms of tax will negatively |
| The supply curve is also affected by changes in | | | | affect the travel industry. When income tax is |
| the supply level in the travel industry, shifts in the | | | | increased then the profitability of the industry |
| demand curve will be caused by increased supply | | | | declines, however when lower taxes are imposed |
| or declined supply level, when the travel industry | | | | then the industry will grow. Tax on citizens will |
| is more profitable more firms will enter the | | | | also result into a decline in the consumers' |
| industry to provide services and this lead to an | | | | disposable income and therefore demand less of |
| increase in supply, however when there is stiff | | | | their goods including transport services; as a result |
| competition and the industry is less profitable then | | | | of this the performance of the travel industry will |
| firms will exit the industry resulting into a decline in | | | | decline. |
| supply, the following chart summarizes the shifts | | | | Monetary policies: |
| in the supply curve in the travel industry: | | | | Monetary policies include interest rates and money |
| The shift from supply curve 0 to supply curve 2 | | | | supply, they will affect the travel industry in a |
| shows a downward shift in the supply curve, the | | | | positive or negative way, in the case where |
| supply curve will shift downwards as a result of | | | | interest rates rise then this makes the cost of |
| increased investment and firms into the industry, | | | | borrowed funds to rise, this rise in the opportunity |
| this increases leads to a decline in the equilibrium | | | | cost of borrowing funds will have a negative |
| price. | | | | effect on the industry, this is due to the fact that |
| The shift in the supply curve from supply curve 0 | | | | investment will decline due to high cost of |
| to supply curve 1 shows an upward shift in the | | | | servicing loans, the diagram below shows the |
| supply curve, this will usually be as a result of | | | | relationship between interest rates and |
| firms exiting the industry, when this happens the | | | | investment: |
| equilibrium price rises because demand exceeds | | | | From the above chart it is evident that as |
| the supply level. | | | | interest rates rises then investment decline, as |
| Changes in price elasticity of demand and supply: | | | | investment declines in the travel industry then less |
| Price elasticity shows the responsiveness of | | | | investors will invest and therefore there will be a |
| quantity demanded or supplied as a result of | | | | decline in the supply in this industry or even a rise |
| change in price, and increase in price elasticity of | | | | in the cost of production. When interest rates |
| demand will lead to a higher declijne in quantity | | | | decline then investment rises and therefore the |
| demanded when price increases, all the modes of | | | | supply increases in the travel industry, therefore |
| transports are substitutes and for this reason | | | | monetary policies aimed at increasing or |
| when the price rises people will choose another | | | | decreasing the level of interest rates will affect |
| mode, therefore when price elasticity increases | | | | the travel industry. |
| then the level demanded will decline by a higher | | | | Money supply in the economy is also determined |
| magnitude when price rises. | | | | by monetary policy makers, when there is an |
| When price elasticity of supply rises then this | | | | increase in money supply then the economy |
| means that a decline in the price will reduce the | | | | experiences inflation, however this increases |
| level of supply by a large margin, this is because | | | | spending for the consumers and therefore they |
| less suppliers will be willing to provide services at a | | | | will demand more in the travel industry, however |
| lower price, however when the price elasticity of | | | | when money supply decreases in the economy |
| supply declines then more suppliers will be still | | | | less funds are available to spend, therefore an |
| willing to offer services at the lower price. There | | | | increase in money supply in the economy will help |
| are other factors that will affect the demand and | | | | ythe travel industry to grow due to increased |
| supply in this industry and this includes income | | | | disposable income and therefore increased |
| elasticity of demand which depict the | | | | demand in the travel industry. |
| responsiveness of demand to a change in price. | | | | Conclusion: |
| Externalities: | | | | From the above discussion the economy will |
| Externalities are the benefits and costs that are | | | | affect the travel industry. an upward shift in the |
| not fully paid for in the production process, | | | | demand curve will result into increased equilibrium |
| externalities are not included in the cost of | | | | prices and therefore increased growth rate. |
| production and we have two types of | | | | however a downward shift in the demand curve |
| externalities and include positive and negative | | | | will result into lower equilibrium prices. Shifts in the |
| externalities. Positive externalities are those unpaid | | | | supply curve will also affect the industry where an |
| for benefits while negative externalities are those | | | | upward shift in the supply curve will result into |
| costs that are not paid for example pollution. | | | | increase the equilibrium price while a downward |
| The travel industry mostly relies on fossil fuels | | | | shift in the supply curve will result into a decline in |
| that highly degrade the environment; consumers | | | | the equilibrium price. |
| also experience positive externalities where public | | | | Rise in equilibrium price will lead to increased |
| means of transport costs may be much lower | | | | profits and therefore firms will gain higher profits, |
| than the benefits. | | | | however a decline in the equilibrium price will mean |
| Pollution is one negative externality associated | | | | a decline in profits and therefore less firms will |
| with the travel industry, this is for the simple | | | | enter the industry. |
| reason that majority of the modes of transport | | | | Monetary and fiscal policies will also affect the |
| rely on fossil fuels that have contributed to the | | | | travel industry where an increase in government |
| high environmental degradation, one of the | | | | spending on transport infrastructure will improved |
| initiative by governments to pay for these costs | | | | transport infrastructure while reduced spending will |
| is through taxation which include tax on these | | | | have negative impacts on the industry. |
| fuels. When source of energy is taxed in this | | | | When interest rate rises then the cost of |
| industry then the cost of production increases | | | | borrowed funds rises and investment decline, |
| leading to a rise in prices and therefore decline in | | | | when interest rates decline then investment rises |
| demand. | | | | and therefore benefits the industry. An increase in |
| Poor weather may also hinder proper running of | | | | money supply increases spending therefore |
| th travel industry, bad weather makes navigation | | | | demand will increase, however when money |
| difficult and therefore reduced activities in this | | | | supply decreases in the economy and therefore |
| industry, birds near airports may also hinder | | | | less demand. |
| freights and therefore result into loss of income | | | | Therefore it is clear that the economy will affect |
| to the travel industry, terrorist attacks may also | | | | the travel industry in many different ways, |
| be viewed as an externality. | | | | government intervention is required in order to |
| Consumers will benefit from positive externalities | | | | cater for market failure such as externalities |
| where public transports are less more cheap than | | | | which occur in the production process. |