After reading this case study and completing the questions, students should be able to do
the following:
Differentiate between demand and supply in the tourism industry.
Determine the factors affecting demand and supply side in the tourism industry.
Distinguish the differences between elasticity of demand and supply.
Identify the concept of sunk cost and it relation with fixed cost.
Identify the perfect competitive market.
Egypt is a leading Arab League country in terms of tourist arrivals. Egypt’s interest in tourism
has reflected on the competitive position of the Egyptian tourism in the Arab League and the
world, Egypt having 1.2% of the world tourism and 1% of the total international tourism
revenues during 2008. To maintain this competitive level the government has improved
infrastructure; transportation facilities and aviation. Meanwhile, the Egyptian tourism provided
services for about 14 million tourists, thus topped in rank the states of the Arab League and
North Africa and ranked the 24th among the most important world tourism destinations.
Tourism makes up more than 10% of Egypt’s GDP and is an important export earner.
The remarkable increase in tourism is attributed to the: promotional activities by the country
(which underpin the rest), reforms done by the government, and Egypt’s strategic location.
Egypt is rich in cultural heritage, with seven World Heritage cultural sites and several
international fairs and exhibitions held in the country. In addition to its cultural attributes, it has
been benefiting from excellent price competitiveness, ranked fifth with competitive hotel
prices, low fuel costs, and low prices more generally.
The tourism industry is segmented according to the level of the services required and the
facilities demanded from the customer. To understand the type of the tourism market in Egypt,
we have to analyze main factors affecting the market including: number of players, barriers for
entry, homogeneity of products and transparency of information. In general, the tourism
industry is extremely homogenous in that all services created and introduced have counterparts
produced by each tourism hotel. In addition, the products, even if branded differently are by
default, homogenous in terms of the sights and places that will be visited. The tourism industry
is a very transparent one. Based on the above analysis, the market structure of the local tourism
industry in Egypt can be considered “Perfect competitive market”.
Unfortunately, Egypt faces a huge drop in tourism numbers due to the Egyptian revolution on
25th January 2011, and the resultant political instability has had a dramatic effect on the number
of tourists. In addition to the regional political instability is neighboring Libya, which have all
added to the perceived risk of holidaying in Egypt.
2
Principles of Economics Arab World Second Edition
N. Gregory Mankiw and Mohamed H. Rashwan
ISBN 978‐1‐4080‐4857‐3 © 2015 Cengage Learning EMEA.
This case study written by Doaa Salman
Associate Professor, Economics Department MSA University, Egypt
Despite this instability in the Arab World it is still attractive due to its strategic location. In
April 2011, Hilton Worldwide opened the 164-unit in Cairo. Hilton plans to add number of
other properties over the next few years to its portfolio across the country, underpinning the
confidence it has in the Egyptian tourism market.
One of the most attractive sites in Egypt is Hurgada, where there are five big hotels competing
in the Hurgada market. This is in addition to many small hotels and they are all considered to
be “price takers”. This means that the relation between Price and Demand is one way only, i.e.
the market price affects the demand, but the demand has no influence on the price. There is no
barrier for entry in this industry in Egypt, which has led to the large number of local competitors
we see in the market. These low barriers expose key market players to high risk due to the huge
competition.
To apply the concept of price elasticity deals with how responsive consumer demand is, to a
change in price. If a price increase occurs (P1 to P2), a corresponding change in demand (Q1
to Q2) may occur. For example, reserving a room is affected by seasonality where in the high
season the prices differ than in low season. This seasonality affects the price elasticity of
demand as it varies from perfect elastic demand to perfect inelastic demand: oppositely, it
doesn't follow the rule of elasticity in the crises times, or in high season times.
In addition to the price elasticity of demand and supply, the income elasticity in the tourism
industry is characterized by a high-income elasticity especially in the Hilton hotel services
where it is a luxury item and it can be highly influenced by the tourist origin country’s
economic growth cyclical pattern.
Questions
- List the factors affecting demand and supply in the tourism industry and Hurgada
Hilton hotels. Is the law of supply and demand valid or not (for Hilton) and why? - Determine the sunk cost in the tourism industry.
- Explain the factors affecting the perfect competitive market types, providing examples.
References
http://www.sis.gov.eg/En/Story.aspx?sid=1042