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Products, Services And Prices In The Free Market

1210 words - 5 pages

IntroductionThe company chosen for this paper is McDonald's Corporation (McDonald's) and the product under consideration is the Big Mac™ sandwich. The discussion will focus on how McDonald's can meet their objective to increase company revenue using the economic concept of "Price Elasticity of Demand" to determine whether to increase or decrease the price. Next, consideration is placed on how the concept of "Income Elasticity of Demand" can be used to predict how the demand for the product would change with regard to a change in income of the customers. Finally, a presentation of the results of our research in the MarketLine Business Information Center database at the University of ...view middle of the document...

This means that the current price is near the middle of top of the total revenue curve. Based on these data Macdonald's should not change the price of the Big Mac because if they increase or decrease beyond the range that is unit elastic the total revenue from the sales of this sandwich will be less.Income Elasticity of DemandIncome elasticity of demand is the degree to which a demand for a good changes with respect to a change in income and is affected by whether the good is a necessity or a luxury. When the good in question is a luxury item demand will be higher as incomes rise or in a higher income area. One McDonald's restaurant opened in a suburban area of Saudi Arabia. The financial status in the area was low and the local people considered eating out a luxury. People in that area were generally dependent on natural foods and mostly cooked at home. The convenience and fairly low prices of fast food were not enough to support the necessary demand for the restaurant to be profitable. After about five months, the restaurant was closed. In this culture, fast food would most likely be considered a normal or superior good, or even a luxury item. As such, it would be expected to exhibit a somewhat elastic income elasticity of demand. McConnell & Brue have stated that, "rising incomes increase demand for all normal goods." (2005, p. 3W-3) If the incomes for the people living in this area of Saudi Arabia were to rise by 10% then an elastic income elasticity of demand would indicate that the demand for fast food would rise by a rate higher than 10%. If the McDonald's restaurant had been opened immediately following a new factory opening in the area that raised the average income in the town, then it is quite likely that the restaurant would have been able to survive.MarketLine Business Information CenterMcDonald's would benefit from an independent review of their corporation. Said review should provide input on their strengths and weaknesses. MarketLine Business Information Center (MarketLine) is a strongly peer reviewed research database. A search of MarketLine results in a SWOT analysis: strengths, weaknesses, opportunities, and threats. McConnell and Brue define monopolistic competition as "characterized by a relatively large number of sellers producing differentiated products." (McConnell & Brue, 2004, chap. 23, p. 1) Findings of the SWOT analysis seem to support a...

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