During 1940, the first
McDonald's restaurant was introduced by two brothers, Dick and Mac in San
Bernardino, California. In 1945, Ray Kroc, a multi-mixer salesman was surprised
by a huge order, 8 multi-mixers from McDonald's in San Bernardino. After that,
he decided to visit this restaurant. Mr. Ray Kroc was impressed by the
effectiveness of their operation as they had only limited menu which were
burgers, fries and drinks, however, this allowed them to focus on the quality of
every steps. Ray Kroc became the first franchisee and opened his first
restaurant in Des Plainers, Illinois, the McDonald's Corporation was created
during 1955. In 1961, he bought all the rights from McDonald’s brothers for
$2.7 million (Mcdonalds.com, 2013). Nowadays, McDonald's is one of the biggest
fast food companies in the world with more than 34000 restaurants in 118
countries (HubPages, 2013). The size of this company is quite big. With its
excellent performances, I have chosen McDonald's as my investigation for this
individual assignment.
The first McDonald's in the world
First
and foremost, for resources used by McDonald's, also known as factors of
production can be divided into four main categories which are land, labour,
capital and entrepreneurship. Land is natural resources which includes the land
which buildings are built on, and the gifts of nature for example, animals and
crops. Labour refers to those workers who are being paid, they produce goods
and services in the production. McDonald has employed around 1.8 million of employees
to run the business. (Aboutmcdonalds.com, 2013). Capital is any man-made aid to
production for example, the machines used to generate French fries and
equipments in the restaurants such as chairs and counters. Entrepreneurship is
the process of combining the other three factors and the entrepreneur of
McDonald's, Jim Skinner, vice chairman and CEO of McDonald's makes risky
decisions about what and how to produce (Hey Leung's Business Blog, 2013).
The
goods sold by McDonald's are normal goods.
Normal good means people will increase consumption of the good when their
income levels increase. Therefore, McDonald's has a positive income elasticity
of demand .When the income level of consumers increase, the demand for McDonald's
will be increased. As for people with lower incomes, McDonald's is counted as
luxury goods for them as they usually consume cheaper products instead of McDonald's .The income elasticity
of demand for those people with lower incomes will be bigger than +1 which means the demand for McDonald's rises
more than proportionate to their changes in income (Tutor2u.net, 2013).
Furthermore,
the demand of McDonald's is also affected by the price of substitute goods.
Substitute good means goods considered by consumers to be alternative to each
other. There are lots of fast food restaurants selling burgers such as Burger
King and Carl’s Junior. In the fast food market, on average the price of Carl’s
Junior is higher than McDonald's. Thus, consumers will demand more McDonald's
which has relatively cheaper price than Carl’s Junior and this shows that
McDonald has positive cross elasticity of demand to Carl’s Junior. Since the
availability of substitutes for McDonald's is high, therefore the demand for it
is elastic. However, the demand for McDonald's can be less elastic or inelastic
for some people because those people have a stronger preference for McDonald's.
In the fast food market, although the price of KFC is cheaper than McDonald's
on average, those people will still prefer to buy McDonald's, hence the demand
for McDonald's is not affected by the price of KFC. The income level and the
price of substitute goods will cause the demand curve to shift. If the demand
for McDonald's increases, the demand curve will shift to the right; if the
demand decreases, the demand curve shifts to the left as shown in the graph
below:
Demand curve will shift
to D1 when the demand for McDonald's increase and shift to D2 when the demand
decrease.
The supply of McDonald's can be affected through
technology advancement. The technology used by McDonald's restaurants have
helped to perform at high level of productivity for example, food can be served
faster. There are many equipments used in a restaurant such as temperature
regulators, inventory upkeep and point-of sales systems (UK Essays, 2013). These
equipments increase the supply of food. Besides, the number of suppliers can
also affect the food supply. McDonald's in Malaysia has a lot of supplier
partners for example, TPC Plus, Dinding Poultry and Nestle (mcdonalds.com.my,
2013). Therefore, McDonald's has enough ingredients to supply its food. Changes
in technology advancement and the number of suppliers will lead to the supply
curve shift. Increase in high technology equipments and the number of suppliers
will increase the food supply. Increase in supply will lead to shift of supply
curve to the right; decrease in supply will shift supply curve to the left.
The supply curve will
shift to S1 when supply for McDonald's increase and shifts to S2 when supply
decreases.
The
elasticity of the supply can be affected by time period. Short run is a time
period which at least one or more resources are fixed and normally capital is
the fixed factor. Therefore, when the price of McDonald increases, they can
only increase the output by using existing equipment. They won't have enough
time to install new equipments or increase its capacity hence, supply is fairly
inelastic during short run. For long run, it refers to a time period in which
all the factors of production are variable. They can increase their supply
easily during long run as they have enough time to acquire more inputs, they
can install more equipments and expand their business. Thus, the supply is
elastic during long run.
McDonald's
falls under monopolistic competition market structure. Monopolistic competition
market is a market which has several sellers and each seller is selling a
slightly different product for example, Burger King and McDonald's are selling
burgers but of different types and flavours (Economicsonline.co.uk, 2013). There
is no barrier of entry in this market so any firm can enter this market to set
up their business. The decisions made by McDonald's will not have much effect
on other fast food companies and there are non-price competitions between them.
Non- price competitions are competitions where companies compete with each
other in terms of product developments and promotions (John Sloman and Alison
Wride et al., 2012, p. 196). In order to let customers know of new menus and
promotion, McDonald's has used several types of methods to advertise such as
posters, commercials and the internet (Promotionmc.blogspot.com, 2013). On June
11, 2008, McDonald's was ranked as Heaviest U.S. Online Display Advertiser among
Quick Serve Restaurant (comScore, Inc, 2013). With the success
of advertising, McDonald's has created brand loyalty. Firms in monopolistic
competition also have some influence on the market price, therefore McDonald's
is a price maker which will seek to maximize its profits. For example, in order
to attract more customers, McDonald's has offered McValue Lunch and Dinner. They
lower their prices at specific time. For example, the original price of
McChicken Meal is RM9.10, however the price has decreased to RM 5.95 during McValue
Lunch and McValue Dinner (Mcdonalds.com.my, 2013).
Advertisement for McValue Lunch
In
a monopolistic competition market, McDonald's can earn abnormal profit during
short run. When there is a new McDonald's restaurant opened in a town. At the
beginning, which is short run period, there is no other substitute fast food
restaurants or there's only few fast food restaurants at that area, the people
there only have limited choices for fast food so McDonald's can earn abnormal
profit at this period. The figure below shows the equilibrium of McDonald's
during short run:
Firstly, the demand
curve of McDonald's is downward sloping because each fast food restaurants is
selling a slightly different food. McDonald's produces quantity Q1 at price P1
which profit is maximized where MC=MR. From the figure above, we can see that
the price is higher than average cost, AC so this restaurant has made abnormal
profit which is the yellow shaded region.
Since those restaurants are earning abnormal profit, this
leads to few more fast food restaurants to enter this town and set up their
businesses during long run. Therefore, these new restaurants will take some
customers away from McDonald's, the demand for McDonald's decreases. The
entering of new fast food restaurants will be stopped when the long run
equilibrium is reached which only remains normal profit .So, McDonald's can
only earn normal profit in the long run (John Sloman and Alison Wride et al.,
2012, pp. 194-195).The figure below shows the equilibrium of McDonald's during
long run:
The firm produces at a
quantity Q2 with a price P2 where MR=MC. During long run, the long run average
cost curve is on the average revenue curve so the average cost is equal to
average revenue so McDonald's can only get normal profit during this period.
For the government intervention, the Malaysia government
has imposed 6% government tax which is indirect tax on the consumers of
McDonald's. Indirect taxes are taxes on expenditure and the burden of taxes can
be shift from producers to consumers. Therefore whenever we pay the bill of
McDonald's, we need to pay the original price + (original price x 6%). The
government may use the revenue to provide public goods or as extra funds for
subsidies. The figure below shows the supply curve with tax:
From the figure above,
when the government has imposed 6% of tax, the supply will shift to the left and the price has increased from P1 to P2. Consumers will pay a higher price
than the original price. The yellow shaded region represents total taxes while
the black shaded region represents deadweight loss which is loss of social
welfare.
Mcdonald's
is one of the most successful restaurants in the fast food industry worldwide
up to date. Economics play an important role in the success of it because
without economics, producers wouldn't be able to know information such as the
demand of consumers, type of market of the industry, inflation rates of the
country and many more. All of these factors allow producers to plan their
strategies in order to achieve maximum profit. Hence, economics is vital and is
the driving force of the business world.
Reference List
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McDonald’s – The Leading Global Food
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8th ed. Essex: Pearson Education.
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