What this lesson teaches
I can use price elasticities of demand and supply to judge how large those changes will be.
Syllabus 8843, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply
Make a guess
A huge concert comes to town for a week. Hotel room rates double. Why?
- Hotels faced much higher staff and cleaning costs during the concert week.
- Demand for rooms rose, and supply of rooms cannot rise quickly.
- Demand for hotel rooms is price elastic, so prices jump.
Show the answer
Demand for rooms rose, and supply of rooms cannot rise quickly.
The number of rooms is fixed in the short run, so supply is very inelastic. The extra demand shows up almost wholly as higher prices.
A whole H1 case study: 40 marks, about 90 minutes in the exam. Answer every part, then compare with the suggested answers.
This is a complete case study in exam format. It is about what happens to prices when a huge concert comes to town. It has eight parts worth 40 marks, like each H1 case study. In the exam you have 3 hours for two case studies, so allow about 90 minutes for this one, including reading time.
The concerts in Extract 1 are real. Every number in Figure 1 and Table 1 is illustrative: invented for practice, not official data.
Allow about 80 to 90 minutes. Read the data and all three extracts first. Write each answer before you open its suggested answer, and use the level descriptors below to mark the 8- and 10-mark parts.
The extracts
Extract 1: Six nights in March
In March 2024, Taylor Swift played six concerts at Singapore's National Stadium, the only stops on her tour in Southeast Asia. The Singapore Tourism Board gave the organisers a grant. Fans flew in from across the region, and hotels, airlines and restaurants reported a surge in business during the concert week. Tickets sold out quickly, and some fans paid far more than the official price to buy tickets from others. Written for these notes from public information.
Extract 2: A hotel's busiest week
A hotel near the stadium normally fills about four out of five rooms. In concert week, every room was booked months ahead, even though the hotel doubled its rates. Its manager said the hotel could have filled its rooms several times over. Some regular business guests complained about the price and stayed elsewhere, and the hotel worried about its reputation. After the concerts, rates quickly returned to normal. Written for these notes; the hotel and its figures are invented.
Extract 3: More money for experiences
As incomes in Asia have risen, more young people are spending on travel and live events rather than on goods. Concert organisers now set prices for the same show differently in different cities, and some use dynamic pricing, raising prices for popular seats as demand builds. Critics say this prices out loyal fans with lower incomes. Organisers reply that if prices are set too low, resellers simply buy up tickets and pocket the difference. Written for these notes from public information.
How the 8- and 10-mark parts are marked
Data parts (1 to 3 marks)
Point-marked. A 'describe' part gives 1 mark for the overall trend and 1 for a refinement. A 'calculate' part gives marks for the working and the answer; 'comment' or 'explain' adds a mark for what the result shows.
8 marks: L2 (4 to 6)
Both sides are explained with clear reasoning using elasticity and tied to evidence from the extracts. A top L2 answer develops both sides fully.
8 marks: L1 (1 to 3)
One-sided, or points listed without explanation, or little use of the case.
8 marks: E (1 to 2)
E2: a reasoned judgement in the context of the case that says what the answer depends on. E1: a judgement that is stated but not explained.
10 marks: L2 (4 to 7)
Price elasticity and the other factors are both developed with clear analysis and case evidence. A one-sided answer is usually capped at about 5.
10 marks: L1 (1 to 3)
Mostly descriptive, one-sided, or not tied to the case.
10 marks: E (1 to 3)
E3: a well-reasoned judgement on how important price elasticity is compared with other factors, with a conclusion. E2: a reasoned judgement with less support. E1: an unsupported judgement.
| Week | -3 | -2 | -1 | Concert | +1 | +2 |
|---|---|---|---|---|---|---|
| Room rate ($) | 250 | 260 | 280 | 520 | 280 | 260 |
| A normal week | Concert week | |
|---|---|---|
| Average rate per night ($) | 260 | 520 |
| Rooms sold per night | 40,000 | 44,000 |
Worked example: Calculate an elasticity
Suppose the price of a good rises from $40 to $50 and the quantity supplied rises from 200 to 210.
- Percentage change in quantity supplied = (210 - 200) / 200 x 100 = 5%.
- Percentage change in price = (50 - 40) / 40 x 100 = 25%.
- PES = 5% / 25% = 0.2.
- Since 0.2 is less than 1, supply is price inelastic: sellers can raise output only a little.
Watch out for this
Hotel rates doubled, so demand for hotel rooms must be price elastic.
The rate rose because demand shifted right while supply could barely respond. The size of the price rise reflects inelastic supply, not elastic demand.
Check your understanding
Why is the supply of hotel rooms price inelastic during a concert week?
- Rooms are fixed in the short run, so few extra can be offered.
- Hotels are not allowed to raise room rates during big events, so few offer more rooms.
- Hotel guests do not care about price, so they book anyway.
Show the answer
Rooms are fixed in the short run, so few extra can be offered.
Right. Hotels cannot build rooms in a week, so even a doubled price adds only rooms held back or closed for repair.