Monday, August 4, 2014

The Law of Demand Illustrated

Basically said, the law of demand is the economic prediction that the price of a good or a service increases along with its demand. To illustrate this, I am going to use the consumer price index (CPI) of traveler accommodation in Canada. This price index measures the change in the current price of the overnight or short stay in hotels or motels in comparison to a reference year.  

CPI of Traveler Accommodation, Canada, 2007:M1-2014:M6 (2002=100), Source: Statistics Canada
CPI of Traveler Accommodation, Canada, 2007:M1-2014:M6 (2002=100), Source: Statistics Canada

Each year, from April, the price of the travel accommodation starts increasing gradually to reach a peak in August. Thereafter, it starts falling progressively to reach an off-peak in December. It then resumes increasing in January to finally fall again in March.

Obviously, the factor that could explain these periodic fluctuations in the price of the traveler accommodation is the tourist season. The tourist season in Canada is between April and October. During that period, bookings and tourist arrivals in hotels or motels soar with peaks in summer. As a consequence of the increase in the occupancy rate in the industry, the price charged also increases.
February is also a busy month in the industry due to the success of winter festivals and sport activities.