South-Western College Publishing - Economics  
Cruise Sales
Subject Comparative Statics
Topic Equilibrium
Key Words Discounts, Real Terms, Prices, Costs, Efficient, Amortize, Unbundling, Tours
News Story

Consumers can buy cruises at steep discounts if they research their options thoroughly and either buy early or late. Today, in real terms, it costs only half of what it cost 15 years ago to go on a cruise.

The reasons for the soft prices are primarily twofold. First, there are many new ships coming into service, with another 34-representing a 25 percent increase-planned over the next five years. Second, costs have fallen because the new ships have been re-engineered to be more efficient. Also, as cruise companies have merged, they have been able to amortize their costs over more berths.

While travelers are attracted by lower prices, they are also attracted by cruise loans, which operate like car loans. In addition, they like the unbundling of air travel from the cruise, which allows more flexibility and reduces the "sticker price." Meantime, specialized cruise dealerships market particular cruise products more intensively than perhaps travel agents would.

The downside of the lower cruise prices is that companies are now charging more for drinks, tours and other extras that are bought on board.

(Updated April 1, 1999)

Questions
1. Draw a price-quantity diagram of the market for cruises. Add a supply curve.
  a) There are many new ships being introduced. Which determinant of supply is affected? Show how the supply curve moves as a result
  b) Which determinant of supply is affected as companies merge and as more ships have re-engineered features? Again show how the supply curve changes.
2. Draw a second price-quantity diagram of the market for cruises. This time, add a demand curve. Assume that the price includes all cruise and air costs.
  a) Cruise loans are becoming more common. Which determinant of demand is changing? Illustrate the resulting change in the demand curve.
  b) The unbundling of cruise packages and improved marketing are also more prevalent. Which determinant of demand is changing? On your diagram, show what is happening to the demand curve as a result.
3. Draw a diagram of the market for cruises. This time draw both a supply curve and a demand curve. Mark the equilibrium price and quantity.
  a) The news story states that prices have decreased and more cruises are being sold. Given your analyses in the first two questions, illustrate how this has happened.
  b) Did supply or demand shift more?
Source Veronica Gould Stoddart, "Sea of Options", USA Today, January 22, 1999.

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