Market Demand and Supply - Equilibrium

Last summer, the number of tourists has fallen sharply in Syria, as a result of the political unrest over last year. Tourism specialists belief that a great number of tourists will find their way to other countries, They believe that, in the long run tourists’ taste may change away from Syria. In response, hotel owners in Syria started to invest in converting their hotels into family housing units, however; this work is expected to be finished only in the long run.

Given the above facts, use a graphical illustration and a brief explanation to show the following on the same figure:

1.      Hotelling market initial equilibrium.

2.      The short run effects on both the demand and the supply sides, if any.

3.      The effect of the rationing function of the price mechanism

4.      The long run effects on both the demand and the supply sides, if any

5.      The effect of the allocative function of the price mechanism.

6.      The final equilibrium of the hoteling market of Syria.

The Answer:

1.     Initial equilibrium at E₁, at P₁ and Q₁.

2.     In the short run demand decreases, shown as a shift from D₁ to D₂, with no change on the supply side. The result is a surplus of Q₁-Q₃.

3.     The surplus causes the price to fall, where the rationing function takes place as the quantity demanded increases and the quantity supplied decreases in response to the price fall, until the market reaches a new equilibrium at E₂.

4.     In the long run, the supply is expected to decrease, shown as a shift of S₁ to S₂, as a result of the conversion of some hotels to residential housing. The demand increases in the long run, but will not reach its level before the political unrest as experts believed.

5.     The allocative function works on both sides of the market, the decrease in demand for hotel services and the decrease in supply will cause resource to move away from hoteling sector toward the residential housing sector to provide the needed services to the growing sector.

6.     The final equilibrium will be at a higher price level than the initial level, because demand will not return to its initial level, while supply is less than it was in the initial equilibrium.