Price Elasticity of Demand | Will Significant Price Increases Affect the Quantity of Package Holidays Demanded?

Customers wanting to book holidays to popular summer sun destinations will find prices are much higher for 2023. Will it impact demand? The concept of PED may help answer the question.

The Guardian reports here on research from consumer group Which? which sugegsts prices for package holidays and flights to popular destinations have increased significantly in the past year.

For example, a week-long trip to Greece is likely to be priced about 30% more than it did in 2022, with holidays in Italy, Spain and Turkey also up by a fifth or more.

The average price for a flight during Easter 2023 to 15 of the most popular destinations is up 51% compared to 2022, with airfares to Italy and Greece up 71%.

Hotel rates outside of the UK and Europe have risen by 23% on average, and European hotel rates have seen an average rise of 10%.

Factors contributing to the price rises include high demand for holidays, inflationary pressure, and currency fluctuations.

So, what will happen to quantity demanded?

The concept of price elasticity of demand (PED) comes into play here.

PED is a measure of how responsive the quantity demanded of a good or service is to a change in its price.

The elasticity of demand for package holidays will vary depending on factors such as the popularity of the destination, the time of year (e.g. outside of school holidays) , and the overall economic climate.

In general, package holidays are thought to have a relatively inelastic demand (i.e. PED <-1), meaning that a change in price does not have a significant impact on the quantity demanded.

Why inelastic? Because package holidays are considered by many to be a luxury item and consumers may be less price sensitive, as they are willing to pay more to take a holiday.

Factors such as loyalty to a particular travel brand, previous experience of great holidays in favourite destinations, and a lack of substitutes can also contribute to the inelastic demand of package holidays.

So, expect to see holidaymakers take the price rises on the chin and start packing their sunscreen and beach towels.