Factors Influencing Demand and Market Equilibrium of McDonald's Burger

This report discusses the factors that influence the demand and market equilibrium of McDonald's burger. It covers topics such as the business and its main products, factors influencing demand, substitute effect, income effect, consumer tastes and preferences, consumer expectations of price, and demographics. The report also explores the pricing policy that should be followed by McDonald's.

Management Economics

Table of Contents
INTRODUCTION..........................................................................................................................3
MAIN BODY .................................................................................................................................3
1.The business and its main products.........................................................................................3
2. Factors influencing demand and Market equilibrium of McDonald's (in case of burger)......4
3.Substitute effect and income effect..........................................................................................9
CONCLUSION.............................................................................................................................12
REFERENCES.............................................................................................................................13
Books and journals....................................................................................................................13

INTRODUCTION
Management economics refers to the application of principles and theory of economics
in the normal course of business. The businesses and its management is always worried about
the effect of factors that determines the demand of its products and services. This matter can
easily be forecasted by the management through the application of economic principles and
theory. The present report is prepared by choosing McDonald's as a firm and Burger as its
product for presenting the impact on its demand due to changes in factors determining the same.
The various concepts associated with demand and market equilibrium along with the factors
affecting the same are taken into consideration in this report.
MAIN BODY
1.The business and its main products
An American fast food company known as McDonald's based in California, United
States was founded in 1940 by Richard and Maurice. The full name of McDonald's is
McDonald's Corporation is the biggest fast food chain in the world with more than 37,000
locations in more than 115 countries. The organization employs more than 200,000 workers
worldwide and has a market cap of more than $150 billion (Howse, 2018).
The establishment offers wide variety of products to its consumers but it is well-known
for its famous product “Burger”. The company offers different variety of burgers to various
consumers to fulfil the needs and wants of the clientele according to their tastes and preferences.
As in today's environment peoples are more conscious about their health and eating habits, the
McDonald's offers fresh and healthy burgers to the consumers, or we can say that the restaurant
offers meals which are approved by diet-experts. The establishment continuously trying to
innovate burgers to keep in mind the health consciousness amongst consumers. To add cherry on
the top. McDonald's also offers organic burger to customers in which except toppings the burger
buns are organic as well as its patty sourced entirely from organic beef. The food chain is also
famous for its speed of serving the customers as they serve 75 burgers per second to their
consumers which is also one of the major element for customers satisfaction. The KFC, Pizza
hut and Burger King are major competitors of McDonald's.

2. Factors influencing demand and Market equilibrium of McDonald's (in case of burger)
a. Price of substitutes: Substitutes of the products refers to the alternative options or
products that the consumer can buy in place of the actual product. These products are use in
place of each others. Such condition arises due to changes in price and supply of the original
product. If the price of one product falls then there would be decrease in demand of substitutes
(Howse, and et.al., 2018). There is direct relationship between the price of one good and the
demand for its substitutes. In case of McDonald's its substitute is Burger king where both of
them offers burger as their key offering in the market and are considered to be the competitors
of each other. When there is a slight change in the prices of burgers by Burger King it can easily
be indicated through the demand curve of McDonald's. In the current scenario McDonald's
burger are cheaper as compared to that of Burger King. This will cause a higher demand for
McDonald's burger over Burger King. The following graph shows demand and equilibrium
position of McDonald's.
Illustration 1: substitution effect
In the above figure it can be easily be seen that with the increase in prices of Burger King
Burger who is a close substitute of McDonald's burger, there is an increase in demand for
McDonald's burger. The market equilibrium will take place at the price and quantity intersects
each other.
b. Price of complements: Complement products refers to the pair of two products that
are used consumed simultaneously. They are also known as pair goods where the both the
products in the pair are used together and in the absence of one the other has no value (Wang

and et.al., 2018). There is an inverse relationship between price and quantity of compliment
goods. If the price of one complement falls then there is rise in demand of the other
complement. Like in case of McDonald's burger the complimentary products are burger and
burger buns. If the price of burger buns rises then there is a fall in demand for burger due to the
fact that the overall price of the burger will increase and this will definitely cause the demand to
fall. The opposite situation takes place if the price of burger buns fall and accordingly demand
will be increased.
The above figure clearly indicates the relationship between demand of burger and price of
burger buns. At higher price of burger buns there is a reduced demand for burger in McDonald's.
The market equilibrium will take place at a price for burger buns where both supplier and buyers
are willing to sell and buy at that particular price (Wang, and et.al., 2018).
c. Consumer income: Income of the consumer also affects the demand for McDonald's
burger. There is a direct relationship between the income of the consumer and demand for
luxury goods. There are two types of goods normal and inferior. Increase in income causes
higher demand for normal goods and lower for inferior and decrease in income causes higher
demand for inferior and lower demand for normal goods (Boland, 2017). In case of McDonald's
burger which is considered to be a normal good, so its demand will rise with the increase in
income and demand will fall with the decrease in income.
Illustration 2: complementary goods and its effect on demand

In the above figure it is clearly shown that with increase in income of the consumer the new
demand curve with more quantity demanded at every price level at right side is drawn. A new
equilibrium price E2 is fixed at higher level of income (Wang and et.al., 2018).
d. Consumer tastes and preferences: Tastes and preferences of the consumers is a big
factor which decides the demand for a particular class of product. We can see that nowadays
consumer are becoming more and more choosy. And this has created more and more demand
for products in fast foods chain. The same has been applied to the burger of McDonald's which
is being demanded at a very large scale (Jalilvand and et.al., 2017). Consumers prefer to go for
McDonald's more frequently. This frequency indicates the preferences for McDonald's from
consumers. The more the consumer will prefer McDonald's products say burger the more will be
the demand for burger.
Illustration 3: income effect
Illustration 4: effect of consumer tastes and preferences

e. Consumer expectation of price: Many times there is an expectation from consumer
side which may be increase in price or decrease in price of a particular good. If consumers
expects the price of the good is going to be increase in future then they will buy it in more
quantity today and if they will expect the prices to be fall in future then the consumer will
postpone their buying on some future date. The effect of these expectations would be in the
former case the current demand for the product increases while in the later case the current or
present demand will decrease (Shahid, Hussain and Zafar, 2017). In case of McDonald's also,
the same concept will be applied where if the consumer expects the prices to be rise in future
then they will satisfy their need for McDonald's burger today and if they expect the prices to be
fall in future then they will postpone their need for future.
This figure indicates that when the customers expect the price to be rise in future then this will
increase the current demand for McDonald's burger at the same price. Like at $5 the demand
rises from 300 to 400 units.
f. Demographics (Number of Consumers): Demographics refers to the number and
type of consumers in the target market. The factors that determines the nature of population are
age, gender, marital status, income, education and the location of the consumer where they live.
If there is a change in the composition of population in the market like due to migrants or any
other reason which results in change in the size of the population then this will create the
demand to be rise or fall of the product (Stankevich, 2017). Like if there is more young
population in the market then this will increase the demand for the McDonald's burger while if
Illustration 5: consumer expectation of price

there are more of old population in the market then this will decrease the demand for
McDonald's burger.
The above figure is the indication of change in demographic factors and the corresponding
impact on demand curve of the McDonald's burger which may be either positive or negative. If
the population decreases due to some calamities then the customers will definitely decrease.
And as against this if there is a rise in the income and employment level of the consumers in the
target market then this will increase their demand for such luxurious products due to to the
improvement in their affordability.
3.Substitute effect and income effect
Substitute effect shows decrease in demand they purchase of product sale due to increase
in their price and consumer switches to their substitute product which is cheaper. Which affect
increase in demand of substitute product (Acerenza, Gandelman, 2019). This cause lose in
market share of the product as the price rises.
Luxury goods are those goods which are consumed when the income rise and then
demanded for those goods. It means that the income elasticity of demand is greater than one.
These goods are also considered as superior goods. These goods are desirable goods which are
inessential and difficult to obtain. Luxury goods are valuable and particular used as a sign of
status. This concept is known as income elasticity of demand which shows how much income
Illustration 6: demographics and its effect on demand

affect the chances of buying luxury goods. Whereas, necessity goods are those goods which are
basic needs for human beings and regardless change of income level like food and vegetables.
The income elasticity of necessity good in between zero and one. That means this product is less
sensitive to income change because increase for necessity goods is less than proportional to
increase in income. From consumer point of view McDonald Burger comes is a luxury good as
only high income people will refer to eat burger and low income people will avoid it to consume
. This means consumer only consume burger when the income level is risen results in demand of
the product increase for consumption. This indicates demand of McDonald burger is more
inelastic as the consumer will small change its demand for burger with the change in income of
consumer. As the price is inelastic of burger is less than one which means these goods have
substituted and can be change when there is change in price of McDonald burger. Consumer
will shift to Burger's king when the price of McDonald increases. The two companies provide
the substitute product to consumer and if the price of one is change lead to increase in demand
for other company product.
As there are many factors which affect the substitute product such as price, quality of
product and geographic area can be changed. From the above figure, it shows that MacDonald

and burger king are substitute to each other. If the MacDonald increases the price of their
product from P1 to P2 which lead to decrease in quantity demanded from Q1 to Q2 by the
consumer. Whereas, substitute of product from Burger King's diagram shows the slightly
increase in demand in small proportional from D1 to D2 due to change in price of McDonald.
Income effect — But Higher level income consumer will remain at the higher product according
to their standard which have no affect in demand if the prices changes of burger (Ikudayisi,
Omotola, 2020). They prefer with their own preferences and are exceptional in income effects.
Whereas, purchase of Burger from MacDonald represent a large portion of consumer income as
it have an inelastic affect which cause less change in demand due to change in income. Large
proportion of consumer are represented here because there is a small change in demand of good
with the change in price as it not only affect price factor but other factor also like geographic
area and quality of product. But the main factor of demand is Price. As the consumer income
rises, consumer want to shift toward luxury products in small proportion as the behaviour is
changing and desired for higher grade products. As income increase the price of goods become
lesser when it considers the substitute factor.
From the following diagram, it shows the income affect is large when it compares to
quantity demanded. These goods are increase in lesser proportion even if the income rises high.
These goods are substitute affect and may shift to other brand product which have higher value
or shows the status by using it. This factor indicates the demand is more inelastic in nature as it
affect the consumer income more and less to the product quantity demanded. The consumer will

shift to Burger king if the values and brand name is more than MacDonald where the prices are
not only key factor. This shows the status symbol of consumer by using it when the income
rises. But the demand for that Burger King is increase in less proportion compare to MacDonald.
But the consumer is willing to spend in higher goods as income rises but the demand for those
good will increase less in proportion as the above digram indicate. The initial quantity demand
for the product is Q1 at the price P1. When the prices decrease in large proportion, it shows the
quantity demand is increase less because the income of consumer is increases and demand for
higher product which indicate their status and symbol in society. If the MacDonald decrease the
prices of their product is cause fall in demand for those whose income rises and preferred
Burger King over MacDonald (Ching Wing, 2020).
The pricing policy that should be followed by business employ as pricing strategy is the key
factor for any company. By setting up pricing strategy for the company can make difference in
profitability, break even point or falling point for any company. Organization have to analyse
the demand of the product by consumer and their competitor price before strategic of pricing
policy. Pricing policy refer how companies sets the price of their product and service which are
based on cost, competitor, value and demand for the product. Pricing strategy is referred to how
company is using the prices of the product to achieve the strategic goal of company by offering
low price which results in rise in sale and higher price decreases the sales of the company.
Developing pricing strategies by evaluating pricing goals like short term and long term profits,
balanced price in market, increase in cash flow of company while looking the market condition
and change according to it. The company should follow low price strategies as they influence
the people to purchase the product with all level of incomers (Roweand and et.al., 2018). This
creates in boost in sales and profits and help the company to capture the market and warding off
competition. Effective pricing policy help in achieve the target goal of the company by taking
into accounts of cost, customer, competition and different market segment for the product. The
customer is smart nowadays and know the prices of the product offerings in the market from the
different competitor and quality given by each of them. Organization have to look into all the
factor to attract the customer and achieve the target goal of company.

CONCLUSION
From this report we conclude that MacDonald and burger king are the substitute to each
other and offering the same kind of product to customers. The report shows the substitute effect
of price of product, price of complement and its affects, consumer income and change in it,
change in consumer taste and preferences, consumer expectation towards the price of the
product and demographic factors and change in it. This also shows the substitute effect and
income effect on luxury and necessity goods and are elastic or inelastic of demand for the
MacDonald burger and change in demand due to income of consumer. Lastly, it shows the
business pricing policy that should be followed by business to attain the pricing target.

REFERENCES
Books and journals
Acerenza, S. and Gandelman, N., 2019. Culture is a luxury in Latin America. Estudios de
Economía. 46(1).
Boland, L. A., 2017. Equilibrium models in economics: purposes and critical limitations.
Oxford University Press.
Ching Wing, L., MARKETER’S PRICING STRATEGY VS. COMPETITION LAW.
Howse, and et.al., 2018. ‘Buying salad is a lot more expensive than going to McDonald's’:
young adults’ views about what influences their food choices. Nutrients. 10(8). p.996.
Ikudayisi, A.A. and Omotola, A.M., 2020. Complement-substitution nexus in the Nigerian diet:
policy gaps in nutrition. Agricultural and Resource Economics. 6(1). pp.37-49.
Jalilvand, M. R., and et.al., 2017. Factors influencing word of mouth behaviour in the restaurant
industry. Marketing Intelligence & Planning.
Rowe, A.K., and et.al., 2018. Effectiveness of strategies to improve health-care provider
practices in low-income and middle-income countries: a systematic review. The Lancet
Global Health. 6(11). pp.e1163-e1175.
Shahid, Z., Hussain, T. and Zafar, F., 2017. The impact of brand awareness on the consumers’
purchase intention. Journal of Marketing and Consumer Research, 33(3), pp.34-38.
Stankevich, A., 2017. Explaining the consumer decision-making process: Critical literature
review. Journal of.
Wang, F., and et.al., 2018. Impact of government subsidy on BOT contract design: Price,
demand, and concession period. Transportation Research Part B: Methodological, 110,
pp.137-159.