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Elasticity of Demand for McDonalds Meals

Introduction

The organization that has been chosen for studying the price elasticity of demand

is McDonald's. McDonald's is an international fast food chain which produces food

products such as burger meals at a cheap price. The organization is well known for

leading valuable brands like Big Mac, Happy Meals and McNuggets (McDonalds

Website 2007). To study the concept of price elasticity of demand, McDonalds has been

chosen because it is widely accepted by consumer world wide.

Discussion

The concept of price elasticity of demand is defined as the proportionate change

in quantity demanded as ratio of proportionate change in price (Buchholz 1995). In the

case of McDonalds, the target consumers are young individuals and people belonging to

the working group. The price elasticity of demand for McDonald's meals is quite elastic.

Elasticity of demand means that when the demand or consumption of the product is

affected by raising the price of that product. Consumers of McDonald's meals are highly

responsive to a change in price of its products due to the fact that McDonald's meals are a

luxury for the low working class consumers while it is inelastic for the high income

consumer group because it is a necessity for them. When there is a change in price of a

McDonald's meal the working group cannot afford it; they will turn to other products that

would fulfill their meal needs. On the other hand, McDonald's are regular meals for those

who can afford them therefore an increase or decrease in price will not make a difference

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to their need for purchasing a quick meal (Riley 2008). The same can be said for

McDonald's franchises which are based in other countries of the world such as Latin

America and South East Asia where McDonald's is an ultra luxury meal for the majority

of the consumers.

Alternatively, McDonald's meals are equivalent and substituted by burgers

offered at cafes, hot dog meals, sandwiches and home cooked meals. These are available

easily and cheaply. When there is a change in price of McDonald's meal it is expected

that consumers will turn to these alternatives for cheap meal needs (Riley 2008; Buchholz

1995).

When the price of the substitutes increases the consumers increase their

consumption McDonalds products. For example when the price of sandwiches and such

similar products increases, while McDonald's retains its price then the consumers will in

increase their consumption of McDonald's meals to compensate for the meals of the

highly priced sandwiches and subs. On the other hand if the price of McDonald's

increases, they will substitute these products for McDonald's burgers. Over the years the

sandwiches business have increased manifolds to compete against burger chains (Mintel

Report 2005). For these reasons, McDonald's meals are fast becoming substitutes for

these sandwiches and subs joints.

Furthermore, complementary goods have increased in demand due to

diversification in sandwiches, subs and burgers businesses. They have also increased

demand due to the demand for healthy food by the masses. For example complementary

products now include salads, health drinks, and juices along with breads, fries and soft

drinks. Hence, as a result the prices of complementary goods have also increased over the

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year.

When there is a price increase in substitutes, consumers naturally turn to the

product thereby increasing demand for the product. When the price of the product

(McDonald's meal) is increased its demand will remain inelastic. Producers gain from

this change in elasticity (or inelasticity of demand) for its product as they will profit more

from both demand as well as price increase.

When the prices of complementary goods increases then producers are forced to

increase the price of their products so that they could compensate for the cost of

complementary goods. Regardless of the price prevalent in the market, the price of

McDonald's meals will increase with in increase in the price of a salad, high priced

breads or increase in prices of potatoes for French fries (Buchholz 1995).

Furthermore, when there is an increase in the prices of complementary goods

consumers are reluctant to buy the product. In the case of McDonald's, the increase in

price of its meals has not really turned away consumers due to the fact that the changes in

complementary products have been the result of demand for it. Consumers have become

health conscious and demand high quality from fast food restaurants. Fast food

restaurants like McDonalds have capitalized on this demand by producing highly

standardized quality meals calibrated with nutritional requirements (Riley 2008). Hence,

a price increase in McDonalds meals for the benefit of a healthy meal has not really

impacted sales at McDonald's. Instead, it has increased demand resulting in price

inelasticity. This is because as McDonald's meals are becoming healthy substitutes for

healthy meals whether cooked at home or prepared at high end restaurants. For these

reasons consumers are turning to McDonald's for fulfilling their health and hunger needs.

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References

Author not available, (2005). Sandwiches Subs & Wraps - US. Mintel

International Group Ltd.

Buchholz, T. G. (1995). From here to Economy: A Shortcut to Economic

Literacy. Dutton.

McDonald's Official Website: www.mcdonalds.com

Riley, J.(4-1-2008). McDonalds: Supplying food to meet changing demand.

Farmers Weekly Interactive. [Online] at:

http://www.fwi.co.uk/Articles/2008/01/04/108894/mcdonalds-supplying-food-to-meet-

changing-demand.html

http://www.mcdonalds.com/http://www.mcdonalds.com/