Pearson New International Edition International pcl tp indd 1

Room rate economics:
Process by which revenue managers price rooms while considering how con-
sumers may react to the pricing strategies that are used.
The fundamental rules of economics of most importance to hoteliers differ based
on the time frame examined. In a short-term time frame, the law of demand is most
important.
FRONT OFFICE SEMANTICS
Law of demand:
Concept of economics that recognizes when supply is held constant, an increase in
demand results in an increase in selling price. Conversely, with supply held constant, a decrease in
demand leads to a decreased selling price.
Understanding the law of demand is critical because, unlike managers in other
industries, hoteliers cannot increase their inventory levels (supply) in response to known
(or projected) increases in demand. The ability to comprehend the impact of this fun-
damental concept is a most critical characteristic of outstanding revenue managers.
To illustrate, assume that a city will be the site of a major annual convention to
be held 12 months from now. The convention will attract enough attendees to sell all
hotel rooms in the city. Despite the fact that demand will increase greatly for the