Management Economics Assessment 1 - Economics Assignment

This report analyses the business model of McDonald's and factors affecting the demand of its products. It explains the concept of demand and market equilibrium, factors affecting price elasticity of demand, and provides a recommendation regarding pricing strategy.

Economics Assignment

Table of Contents
INTRODUCTION ...............................................................................................................................3
TASK 1.................................................................................................................................................3
Task 2....................................................................................................................................................3
Demand and market equilibrium.....................................................................................................3
Factors affecting the demand of McDonald products......................................................................4
TASK 3.................................................................................................................................................6
CONCLUSION ...................................................................................................................................7
REFERENCES.....................................................................................................................................9

INTRODUCTION
This report will analyse the business model of the quick service restaurant- McDonald's. The
report will start by describing what is the main operation of the business. And how do they position
its products in the market as compared to its competitors. The analysis then goes on to state why
this business was chosen, and establish the relevant factors that will be considered in this report.
The economic analysis begins by establishing what is meant by the concept of demand and market
equilibrium. It further proceeds to describe how the factors such as, prices of substitutes and
complements, consumer's tastes and preferences, and the demographic affect the demand of a
product., and go on to link this to McDonald's business (Agrawal and Vora, 2020). The analysis
further deepens when the concept of price elasticity of demand is introduced in it. The concept is
briefly explained before explaining factors affecting price elasticity, and how it affects McDonald's
directly. Finally, the report provides a recommendation regarding how the top management of
McDonald's should price its products and if the company should continue to employ this pricing
strategy.
TASK 1
McDonald's is the world's leading chain of hamburger fast food restaurants and one of the
world's leading food-service retailers. The US-based company was established in 1954 by
businessman Ray Kroc. McDonald's serves more than 65 million customers every day at his over
35,000 local restaurants in 119 countries (Mcdonalds, 2017). The company employs over 2 million
people internationally. Plus McDonald's restaurants are operated by subsidiaries, franchises or the
company itself.
McDonald's relies on working procedures that enable restricted menus, division of labour,
homogeneous products, assembly line strategies and specialized skills, all of which are applied to
customer-protection, safety and product. Product quality and customer satisfaction are the
foundations that enable McDonald's to create superior fast food service.
McDonald offer a wide variety of product which serves the world. They have a product line
of 145 items in their menu from all over the world. Some of its popular product are the Big Mac,
Big n' Tasty, Quarter Pounder with Cheese, Cheeseburger, French Fries, Egg McMuffin, Apple Pie
and Sundae. This is why they are lending hamburger fast food chain in global and local market.
McDonald's products are better investment than any other burger rivals. McDonald emphasised on
fresher ingredients and healthier once, in addition to this they also gives customer honest,tasty good
and a reasonable price. Reasons why McDonald's company and product are best:
 24/7 Restaurant and Delivery Service- In 2005, McDonald's introduced the industry's first
24-hour restaurant and all-day McDonald's service at restaurants. Customers can dial 86-2-
36 at any time or log on to mcdelivery.com.ph to receive their McDonald's Favourites and
tasty food. In 2014, McDonald's extended his McDelivery service to his mobile devices via
the McDonald phone app, which is free to download from the App Store and Google Play
Store.
 Quality Service and Cleanliness- McDonald's have world class standards in quality,
cleanliness and services. They ensure in maintaining cleanliness within their restaurants as
part of their daily operations. They have proper and fresh sourcing of ingredients for their
products.
Task 2
Demand and market equilibrium
Demand is an economic principle that refers to the desire of consumers to purchase products and

services and their willingness to pay a particular price for them. When the price of a products or
service increases, the quantity demanded tends to decrease. Similarly, when the price of products
and services decreases, the quantity demanded increases.
Equilibrium is achieved when supply and demand equals in a perfectly competitive market.
QS = QD
Therefore, the price fluctuates up to QS = QD. If the price has not reached this level, two main
mechanisms are involved to ensure that the price adjusts until it reaches that level. These are as
described below:
If prices are above the clearing price, manufacturers are left with excess inventory that consumers
do not want to buy at current prices. In such situations, the market is defined by a so-called excess
supply. To reduce these inventories, producers have to accept lower prices for their goods. Prices
will decrease until the supply gets equal to demand (Correll and Battafarano, 2022).
If the price is below the clearing price, there is so-called excess demand. Many consumers are
unable to purchase the products they are looking for because their suppliers are out of stock. At
current prices, the supplier cannot meet the demand. Market forces will with time correct this
situation as consumers raise prices until an equilibrium price is reached.
Manufacturers are price takers in a perfectly competitive market. Individual price changes are not
possible. All buyers and sellers have complete information about sales quantities and current prices.
Without these conditions, QS = QD does not necessarily lead to equilibrium. For instance, if supply
is controlled by a monopoly, the latter can set the price as it pleases. But monopolies are still tied to
how much the market demands at a particular price. Now let imagine a situation where information
on market conditions is not widely available, even though the supplier is a price taker. In this
situation, excess supply or demand can remain, slowing or impeding the process of reaching
equilibrium to QS = QD. But in a competitive environment, there are prices, which independently
determine where suppliers and consumers positioned along their respective supply and demand
curves. There is also an equilibrium price defined by the interaction of supply and demand (Haley
and Love, 2020). At equilibrium there is no reason for the market to move from that position unless
either the supply or demand curves are moving.
Factors affecting the demand of McDonald products
The quantity Malaysians demands also rely on other variables like prices of products or
services, income of consumer, complements price, expectations of consumer, consumer preferences.
These variables are important factors that can result in shift of the demand curve for gas and oil. To
get an understanding about how each of these factors significantly affects demand, we must assume
all other determinants to be constant. For instance, to examine how demand for McChicken burgers
is affected by customer preferences, assume that the product's price, income of consumer, and other
factors are held constant. This theory of keeping other factors constant is termed as "ceteris paribus"
in economics and can be translated in English as "other things are equal"(Hindsley and Morgan,
2020).
Price of the goods or services: As mentioned earlier, the price of products and services is one of
the main determinants that influence the demand side of goods. McDonald's burger prices are
sensitive to market deviations from their equilibrium position as McDonald's hamburgers have
many substitutes made by multinationals like Subway and Burger King and other local
manufacturers. Therefore, if McDonald's burger prices rise significantly and differ from the normal
prices of Malaysian burgers, consumers will be in favour to purchase burgers from the mentioned
competing brands and stay away from brands of McDonald's. On the other side, if McDonald's
hamburger prices fall, demand will increase, while other factors remain constant (Huang and Zheng,
2021). This can be depicted graphically as shown below:

Consumer income: It is one of the factors that influences consumer demand. However, unlike the
price of products and commodities, the relationship of income of consumer to quantity demanded
may vary relying on the good type. For ordinary commodities such as technology products, leisure
and service products, and consumer durables, income and demand are directly related. This
relationship is illustrated in the diagram shown below. This indicates that when income of consumer
increases, the quantity demanded of the product increases and vice versa. In contrast, as shown in
diagram below, an income increase leads to a decrease in demand for inferior goods, shifting the
curve to the left. Examples of inferior goods are basic necessities such as bread and rice (Otobideh
and Yusefzadeh, 2021). McDonald's is known for its cheap, fast, and unhealthy food, so
McDonald's burgers is kind of an inferior product. A consumer income increase therefore leads to a
gradual decline in McDonald's burgers demand. It is because of the reason that people tend to
expend more on healthy food than on unhealthy food. When their income decreases, people also
tend to expend often on cheap fast food at McDonald's.
Price of substitutes and complements: The price of related products and services are also factors
of Malaysian people demand for McChicken Burger. Related products are either substitute or
complementary goods. As the price of substitute goods rises, demand for other commodities
increases. For instance, the McChicken Burger is an alternative to the Burger King Burger. As the
price of a McChicken burger increases, the quantity demanded decreases, as shown in diagram
below (Paramati and Doğan, 2022). However, since Burger King's hamburgers are the perfect
substitute, this has increased demand. Complements are different than substitutes. For instance,
demand for McChicken burgers increases when the price of chicken falls.

Consumer expectations: Customer expectations is defined as the set of actions expected of a
person when interacting with the enterprise. There are various ways that customer expectations shift
the demand curve. For example, if a consumer expects the price of McChicken burgers to drop,
consumer will wait to purchase if the item is cheaper. Either way, demand for McChicken burgers
will decline and demand curve will shift to the left. If buyers anticipates McChicken burger prices
to increase in the future, they will buy it now. This increases demand for McChicken burgers and
shifts the curve to the right.
Consumer taste and preferences: Consumer preference explains the degree of satisfaction a
consumer derives from a set of products. Malaysians satisfaction with eating McChicken will be
more satisfying with eating a Burger King burger because these two are alternative goods that
satisfy the same craving. Consumer preferences are less visible. It may be a factor, but it can have a
large impact on shifting the demand curve for a product.
TASK 3
Price Elasticity of Demand (PED) is an economic framework which measures the sensitivity
of goods and services to a change in price. PED is calculated by dividing percentage change in
quantity demanded with percentage change in price of that good. Since price and demand has an
inverse relationship, PED value is always negative (however, the minus sign is not considered in
conventional usage). If the PED value is between zero to one, the demand for that good is said to be
inelastic. That is a big change in prices, results in only a small change in the quantity demanded of
that good. If PED value crosses one however, the demand for that good is said to be elastic in nature
(Profillidis and Botzoris, 2018). That is, even a small change in prices translates into a relatively
larger change in the quantity demanded for that product. There are four main factors that influence
the Price Elasticity of Demand and these are:
Availability of substitute for the product – The number of direct competitors, and also indirect
substitutes affects the price elasticity of demand the most. Higher the number of substitution for a
good or service provides the customers with more options to switch to other products. McDonald's
is a fast food chain operating around the globe. Even though the company was the pioneer in
adopting this business model, over a period of time multiple competitors such as Burger King, KFC
and Domino's have taken entry into the market space. Which has adversely affected the price
elasticity of demand in the fast food chain market. These big global brands along with local food
stores have caused an increase of choices and hence lowered the dependency on McDonald's to
provide the fast food service. Making the demand for McDonald's elastic among consumers (Ren
and Siqin, 2020).
Is the good luxury or necessity- A good is considered to be a luxury product if it has a relatively
elastic demand curve and also has a positive correlation with income. A necessity product however

has a relatively steeper demand curve indicating an inelastic demand. This goods also have a
positive correlation with income however, not as high as luxury products. Analysing this framework
in McDonalds' context provides a unique outlook. This is because, McDonald's is seen neither as a
luxury product nor a necessity product in the developed nations, where there are lot of options
available to the consumers. However, for developing nations the McDonald's services can be
considered to be more luxury goods than necessity (Sarihi and Faizi, 2021)
Proportion of Income Spent- It is observed that, a goods' price elasticity of demand tends to be low
when proportion of income spent on that good is also low. In other words, lower the spending on a
good, the more inelastic its demand. Known for providing quality food cheaply and quickly, the
whole business idea for McDonald's revolves around the idea to be efficient and affordable to the
general public. And this would allow for consumers to avail the benefits of McDonald's services at a
cheap rates. Hence not a large proportion of the income would go towards the consumption at
McDonald's. Providing with an advantage with regards to the price elasticity of demand for its
products since the, demand is inelastic (Sturm and Hartmann, 2021).
Time passed since price changed- Even though McDonald's regularly modify its menus and pricing
strategies, it does not necessarily cause a disruption with changing the prices by a lot. And it has to
maintain this strategy as McDonald's cannot afford to raise its prices by a lot given the elastic nature
of its products, and will almost immediately lose its customers to other rivals.
Observing the price elasticity of demand's factors mentioned above, McDonald's seems to have a
relatively elastic demand curve. Surely, its low prices provide affordability and a quick service
results in quick customer turnover, help the company to maintain its low prices with the help of
economies of scale. And these factors would help the company in attracting customers. However,
given the high substitutability for its products in the market will prove to be a major point of
competition for the business (Zhu and Yang, 2018).
From a consumer's point of view, it is relatively ambiguous whether if McDonalds' products are
luxury or necessity. In developed and first world nations, McDonald's is seen neither a luxury nor a
necessity. It is more of a comfort food attracting customers with quick service at affordable prices.
In second, and third world nations where household incomes may be lower, and preferences vary,
McDonald's can be considered to be a luxury good. However, it is worth noting that as those market
saturate further, that opinion will change rapidly as well. Therefore, it can be argued that
Mcdonald's is not a luxury product and more a convenience product.
Given the analysis done above, it is observable that McDonald's is in a extremely competitive
market. And hence competes on the basis of price competition. It will try to increase its efficiency
to increase economies of scale, to cut costs which will translate into to lower prices for consumers.
And given the elastic nature of the products offered by McDonald's it can be recommanded to
continue with this pricing strategy (Zin and Moradi, 2019).
CONCLUSION
From the above report it is concluded, both demand and supply are of paramount importance
in analysing the flow of economic activity. Supply is the specified quantity that a particular product,
such as McChicken Burger, is offered to consumers in the market. Demand, on the other side, is the
desire of customers to purchase those goods. It measures the extent how much money consumers
will spend on the price of goods and services. These two economic concepts may change the level
of each other. They are very important in assessing and forecasting economic conditions, as they

significantly manipulate the prices of customer products and services in the market. Market
economics principles dictate that the inter relationships of supply and demand are likely to become
imbalanced at some time in the future. The price of a commodity indicates that the quantity of the
commodity supplied is equal to the quantity of the commodity demanded at the equilibrium point.
The economy is in perfect condition, with neither surpluses nor shortages. However, it is necessary
to consider that supply and demand are sensitive to various factors that lead to changes in curve.
The relationship between demand and supply affects sellers' decisions to develop cost-effective and
strategic methods.

REFERENCES
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