McDonald's is one of the international food corporations, which mainly produce and sell
fast foods, such as burgers, fries and soft drinks. It also sells salads, wraps
and deserts to fulfill the different taste of their consumers. Basically McDonald’s
is producing normal goods to serve customer in line. McDonald's now has franchises in 119 countries,
including Malaysia. It was
published in Malaysia when the license was given to the GOLDEN ARCHES
RESTAURANTS SDN by McDonald’s Corporation, USA and allows them to operate McDonald's
restaurants since December 1980. In 29 April 1982, the first restaurant of
McDonalds in Malaysia was opened at Jalan Bukit Bintang, Kuala Lumpur. Today, McDonalds owns more than 200 restaurants and it is currently increasing at
about 20-25 restaurants yearly in Malaysia. The head Office of McDonalds in
Malaysia is now located at Damansara Uptown3, No.3, Jalan SS21/39, 47400
Petaling Jaya, Selangor. When McDonalds was first operating its business in
Malaysia, it faced problem as their brand’s awareness wasn’t strong in our
market. McDonald’s, as one of the most successful restaurants in the world, it has
its own behaviour in solving economic problems within its economic structure. Take
a simple example: when the people are getting crowded and there is lack of seats,
the normal restaurants will just add more tables and chairs to add another limited
amount of customers, which is not effective. But for McDonald’s, they divided the
dining areas into separate zones, to ensure all customers can get their seats whenever
they dine-in, or waiting people with their meals. Furthermore, McDonald’s also added
a drive-through service to satisfy consumers.
Short-run
and Long run
Table above shows the fixed factors and variable factors of McDonalds. Factors such as labour and raw material which can be changed quickly are defined as variable factors, while factors that take long time to change are defined as fixed factors, which are equipment, technology, land and management.
Short run is a period of time in
which at least one factor of production is fixed (Kennnon, 2011). In simple, only
variable factors can be changed or varied, fixed factors cannot be changed in
the short run. Therefore, if McDonald’s restaurants wanted to increase its
output of food in the short-run then it would increase the factors that are
available to be changed quickly. These are variable factors. For example,
McDonalds can purchase more raw materials such as meats and buns or may be hire
more part-time workers to increase its output (fast foods), but they cannot
change any of the fixed factors.
Long run is a production period in
which firms can make all desired resources adjustment (Osbome, 1997), which means that in in
long run, McDonald’s is able to change all its factors. The factors including
buildings; introduce new technology or apply new management strategies. In
general, the changes in at least one of the firm’s fixed factors will result
the long-run production. For example McDonald’s can increase its output by
increasing the number of seats in restaurant as the restaurant can serve more
customers. Alternatively, McDonald’s also may use a better technology to boost
their producing speed.
Economies
of scale and Diseconomies of scale
According to Riley, economies of
scale is the reduction in average total cost of producing a product as the firm
expands the size of its operations in the long run. Thus, as the McDonalds is
expending its market size, a number of determinants can lead to lower average
cost of production. One of the types of economies of scales includes purchasing
economies, which gained when a large firm buy in bulk through long-term agreements
with producers/suppliers. For example, McDonalds buy chicken nuggets in a large
quantities and it received discounts from the suppliers through long-term
contracts. Next, McDonalds also gained financial savings because they can
generally borrow money from bank in a lower interest charges compared to small
firms. This is because McDonalds have more valuable assets and are seen to have
a low risk. Therefore, McDonalds can obtained lower interest charges when
borrowing money from banks and having access to a greater range of financial
instrument.
However, the average costs will
eventually rise because of diseconomies of scale. Diseconomies of scale occurs
when the unit cost or average cost per unit rises with more output because of
several factors. One of the types of diseconomies of scale is co-ordination
problem. McDonalds, a large firm may have barriers to co-ordinate its
operations as there are many departments and divisions. McDonalds may be slower
to respond to changes in market conditions as the information will be distorted
when the messages is passed from the head office to their franchises. Moreover,
McDonalds finds out that controlling the productivity and the quality of output
from a large number of workers is imperfect and costly. Therefore, it leads to
diseconomies of scale.
Demand
and Supply
From the diagram above (Figure 1),
it shows that the demand and supply of Malaysia’s McDonalds are increasing
since 2009. The determinants of demand include preference and time session.
Firstly, consumers prefer McDonalds as a substitution of different fast food
restaurants in Malaysia. According to local market research, the price of McDonald’s
meals is much affordable to consumers. Therefore, the demand has an increasing
trend. Next, it is the time session. McDonald has a Lunch and dinner sets
promotion in a period of time. The demand will definitely rise as the price
will be lower in the promotion period. Based on figure 1, the determinants of
demand have successfully pushed the demand higher.
In the other hand, the determinant
that affects the supply is technology improvements. McDonald’s has teamed up
with Echelon Corporation in order to improve the kitchen equipment’s
technology, to be lower energy consumption and faster production. While the
production costs become lower, McDonald’s is able to produce foods in a lower
cost. Thus, it stimulates the supply to become higher.
Elasticity
Price elasticity of
demand is the responsiveness of quantity demanded to a change in price (Peavler, 2011).
There are two types of
elasticity of demand: elastic inelastic demand and elastic demand. When the demand
is inelastic, price will change proportionately more than quantity. Therefore,
the change in price has a bigger effect on total expenditure than does the
change in quantity. On the other hand, when demand is elastic, quantity
demanded changes proportionately more than price (Bajada, 2012). Hence, the
change in quantity has a bigger effect on total consumer expenditure than does
the change in price.
From the table above, McDonald’s
has gained RM 89.5 billion profits from the highest sales of Happy Meal Sets.
Comparing to the other meal sets, the price and demand of Happy Meal are
obviously the highest. According to the research from web, people are willing
to pay more for “Minions” toys. Hence, they will demand for more Meals but just
for the toys. This has affected the sales of McDonald indirectly. Hence, the
Happy Meal Sets have inelastic demand. Which means, in simple, people will
still consume Happy Meal Sets even its price will be increased. When the demand
is inelastic, an increase in price will raise up the total revenue of firm.
Hence, McDonalds can try to increase the price of Happy Meal Sets in order to
earn more profits.
Cross-price
elasticity of demand
It is a measure of the responsiveness of demand for a product to a change in the price of a substitute or a complement, other things remaining constant (Graham, 2011). The cross elasticity of demand for a substitute is positive, while the cross elasticity demand for a complement is negative. Graph below shows the cross-price elasticity of demand of McDonalds’ fast foods.
McDonalds
need to consider the surrounding political
and legal environmental forces before it enter Malaysia’s market. The legal requirements are used to protect, and ensure
the companies and the employees are working under legal conditions. The
political environment also must be concerned by the McDonalds because the risks
will be taken when it decided to expand its business in other countries. The
government policies on the regulation of fast food operation will affect the
McDonald’s operations as government has the ability to control the license
given for giving permission to operate its fast food restaurant. Hence,
McDonalds needs to follow the Malaysian Labor Law because the law is set to
protect its workers by ensuring all hiring, training, repatriation and
compensation according to our country’s law. Most importantly, McDonalds in
Malaysia is required to follow laws, such as quality and environment
certification (ISO) and the Halal certification (refer figure 2 for more legal
requirement information), considered Malaysia is a Muslim country. For example,
when McDonalds entered Malaysia’s market, they need to pay attention on the raw
materials, processed products or additives in order to make sure they are all certified
Halal and the food produced can be eaten by Muslim. As a result, McDonalds
needs to ensure all materials and processes are as claimed or must followed, in
order to protect its integrity and consumer confidence.
Monopolistic
Competition
Monopolistic competition, which is characterized by a large number of
sellers, differentiated products (oftern promoted by heavy advertising) and
easy to enter or exit the industry. McDonalds is a fast food company with the
ability to set their own price without losing customers because of product differentiation.
Therefore, McDonalds is in monopolistic competition and it used product
differentation to compete with its competitors (Barra, 2012). McDonalds trying to
differentiate their products (fast foods) from other competitors through advertising
and creation of brand names to ensure that
customers know that its product differs from its competitors, such as KFC nad
Burger King. For example, McDonald’s use its brand and advertise a lot to
differentciate themselves among all competitors. The advertising provides
indirect signal to attract customers and buy its products (food) continuously.
The monopolistic competitor’s(McDonald’s) demand curve is
more elastic than the demand faced by a pure monopolist because it has many
competitors producing closely substitute goods, for exmaple, Burger King
produced a similar humbarger as a substitute good of McDonalds. The price
elasticity of demand faced by the monopolistic competittive firm is also depends on the degree of product
differentiation.
Diagram
below shows the market size of fast foods restaurants in Malaysia and the
equilibrium of the firm under monopolistic competition in short run and long
run.
Short-run equilibrium:
Reference
List
Barra, D. (2012) How does McDonald’s compete in a
monopolistic competition. Available from: http://economicsofmcdonalds.wordpress.com/2012/05/12/how-does-mcdonalds-compete-in-a-monopolistic-competition/ [Accessed 20 October 2013].
Bajada, C. (2012) Economic principle. McGraw-Hill,
Australia.
Graham, R. (2011) Cross-price elasticity of demand in
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[Accessed 21 October 2013].
Kennnon, J. (2011) What is
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[Accessed 21 October 2013]
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