Supply and Demand of McDonald’s Products

McDonald’s business involves the franchising and operation of restaurants, a business that covers 117 countries (McDonald’s Corporation, 2010). The entity’s products range from breakfast items such as egg muffins, and egg cheese biscuits, through core menu items such as hamburger, and French fries to snacks, beverages and salads (McDonald’s Corporation, 2010). This paper addresses how various aspects of demand and supply affects McDonald’s business.

Based on the products that the restaurants offer, various factors would change the demand for products offered by the entity. The first of these would be the price of the products at the restaurants. High prices could deter consumers from purchasing from the restaurants especially when other determinants such as substitutes and incomes level are considered (Andreyeva, Long & Brownell, 2010; Akbay & Jones, 2006). Where the entity for instance operates in low income regions, high prices would deter customers from purchasing from the store since such purchases would significantly reduce the amount income available for other expenditure (Andreyeva, et al., 2010). Similarly increasing the prices of one product e.g. the Big Mac could lead to the customers shifting their attention other products of the entity (e.g. chicken McNuggets) or to products of competitors (Andreyeva, et al., 2010). Prices of similar products by other firms could thus influence the level of demanded quantity in the restaurants with lower prices having the potential to attract customers from the entity. Such changes would however also be subject to customer preferences ad tastes. With the experience that McDonald’s has acquired over the years customers may deem their products to be of better quality thus driving some level of consumer loyalty.

Just as the demand changes with respect to price, the supply would also respond to price fluctuations. McDonalds would for instance want to supply more of its products when prices are high to gain maximum profits. This however would also be affected by other factors such as the availability of raw materials and capacity for the entity to bake additional quantities. The quantity supplied would thus be subject to the prices of inputs (e.g. wheat, labor) and the amount of each input required to increase the baked quantities (Akbay & Jones, 2006). The company would thus be willing to supply more when the aggregate outcome of these factors is increased profits. Similarly the prices of related products would influence McDonald’s resolve to increase the supply of one product. Where two products for instance share the same inputs such as labor and raw materials (e.g. Fruit ‘n Yogurt Parfait and Chocolate Triple Thick® Shake) an increase in the prices of one could lead to increased focus on such a product and decreased focus on the “joint” product. The supply of both products will thus be affected.

The quantity demanded for McDonald’s products can be altered through price changes. Lowering the prices would enable the customers’ income purchase more quantities than they could previously purchase hence could motivate them to visit the restaurants more often. Other marketing activities such as promotion (advertisements, running a competition based on customer purchases), bringing the restaurants nearer to the residential and offices and improved quality of the products (e.g. adding the nutritive value of the products) would influence the customers to purchase more of the product (Andreyeva, et al., 2010). Quantities of substitute products could also be influenced by altering the prices of one of the products. Increasing the price of one of the substitute (e.g. Fruit ‘n Yogurt Parfait) could for instance influence customers to increase their demand for the other product (e.g. Chocolate Triple Thick® Shake) whose initial demand might have been lower than the entity would have liked (Andreyeva, et al., 2010).

Demand of the products could also be affected by the increase in income levels. If the government increased the minimum wage for instance, the income available to the consumers for expenditure would increase thus they could spend a portion of the surplus income on the entity’s products (Akbay & Jones, 2006). Based on such increases the firm can benefit either by selling more quantities of the product or increasing the prices of most demanded products to a level that customer ability to purchase the products would not be altered. In both cases the firm would benefit from an increased profit margin if the cost of providing the products remained the same. Minimum wage increment however could lead to increased labor costs thus increasing the cost of production to offset the gains that would have otherwise accrued.

References

Akbay, C. & Jones, E. (2006). Demand elasticities and price-cost margin ratios for grocery products in different socioeconomic groups. Agri. Econ.-Czech,52(5), 225-235. Retrieved July 1, 2010, from http://www.cazv.cz/attachments/ZE_52_225-235.pdf

Andreyeva, T. Long, M. W. & Brownell, K. D. (2010). The Impact of food prices on consumption: A systematic review of research on the price elasticity of demand for food. American Journal of Public Health, 100(2), 216–222. DOI: 10.2105/AJPH.2008.151415.

McDonald’s Corporation (2010). Annual report 2009. Retrieved July 1, 2010 from http://www.aboutmcdonalds.com/etc/medialib/aboutMcDonalds/investor_relations0.Par.17264.File.dat/2009%20AR%20Report%20-%20Print.pdf

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