The Economics of Tourism Companies

The Economics of Tourism Companies (TOURISM COMPANY ECONOMICS) Tourism company economics tries to explain the behavior of market agents. Where the main questions of interest are related to the size of production and prices, namely how do tourism companies decide how many services to offer and at what price? This explanation usually assumes that firms, aim to maximize their profits. The principle of profit maximization has long been used to explain corporate decisions, and is currently an important assumption and the most extensive introduction to the theory of the firm. (Beattie et al., 2009; Varian, 2010; Mankiw, 2015). From this perspective it must be considered that profit does not only refer to the company's current income but also the company's future income. Each decision, is made based on an evaluation of its contribution to company profits, discount times and risks. If the expected profit increases, then a decision is made. If not, then the idea is rejected. Cost Tourism company costs can be divided into fixed costs (FC) and variable costs (VC). Thus, the total costs (TC) of the company are equal to the sum of fixed and variable costs (TC = FC + VC). Fixed costs are costs that do not depend on the quantity of services provided. for example: expenses for property rental, permanent staff salaries, cable TV subscriptions, company website hosting, and insurance. Meanwhile, variable costs are costs that vary depending on the amount produced, such as fuel in transportation services, materials for preparing food and facilities offered by the hotel to guests. Some tourism company costs also have fixed and variable cost sections. An example is the case of hotel water bills. Where guest water consumption is a variable cost. Meanwhile, water used to clean hotel areas is included in fixed costs. An important measurement for cost analysis is average variable cost (AVC), which is the result of dividing variable costs (VC) by the quantity (Q) of services produced (AVC = VC/Q). This value is often assumed to be constant, so that the firm's total costs are taken as a linear function of the quantity produced. If this is true, then each unit of service will generate the same quantity of costs for the firm, regardless of how many units have been previously produced. Therefore, the greater the quantity produced, the smaller the average variable costs. In other words, instead of growing linearly as a function of quantity produced, total costs actually grow more slowly. This phenomenon, known as economies of scale, is one of the main explanations for the success of large companies. Many tourism companies have high fixed costs compared to variable costs. for example, travel agencies almost all costs are fixed and do not depend on sales. Most hotel costs are also incurred regardless of the number of guests. Even if a hotel does not accept guests in a particular month, it is possible that the hotel will incur larger costs, such as salaries and interest on the initial investment, which must usually be paid. Income A company's revenue is generated from the number of sales and the price charged. If the price of tourism services is the same for all customers, then the company's income (R) is the result of multiplying the price (P) and the number of sales made (R = P × Q). However, in most markets, the price charged influences demand and quantity sold. If prices are very high, then demand will be low. Conversely, if the company sets a low price, then demand will be high. Therefore, quantity is the inverse function of price. Maximize profits Profit is the difference between revenue and total costs (S=R-TC). If a company's goal is to achieve the highest possible profit, then its decision to provide services will be made based on a comparison between revenue and total costs. Management must choose to increase production and sales every time the company's profits increase. If the increase in revenue resulting from increased sales is not enough to pay for the increase in total costs, the best decision is not to increase production. Naturally, reducing costs without reducing the quantity produced will also increase company profits. Likewise, increasing sales without reducing prices will also increase profits. Increasing sales without reducing prices is a problem commonly studied by the marketing field. Price and revenue management The logic that is widely used to determine the prices of goods and services is the definition of Markup. In this perspective, the selling price is equal to average cost plus a certain percentage. The markup can be calculated based on average variable costs, namely P = AVC x (1 + M), or average total costs, P = ATC x (1 + M). For example, if the AVC is $80 and the markup is 25%, then p = 1 x (1+0.25) = $100. Apart from using markup, you can also calculate profit margin. In this perspective the percentage value refers to the selling price, not cost. If calculated based on average variable costs, namely P=AVC/(1 – net margin), whereas if calculated based on average total costs, namely P=ATC /(1 – gross margin). For example, if AVC = $80 and net margin is 20%, then P = 80/(1 – 0.2) = $100. The markup or margin percentage should be set by the company primarily based on competition and demand analysis. The less competition and the less sensitive demand is to price, the greater the percentage. Another simple pricing rule also occurs in highly competitive markets. In this case, the price of the service can be determined by analyzing the prices charged by competitors. Simultaneously, differences between services must be taken into account. Services that are better than competitors can be sold at a higher price, but worse services must be cheaper if they are to find some demand in the market. Because better services tend to have higher production costs.