Introduction

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.

Government Intervention

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. 

                 

v  Figure 2

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:

Long-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 managerial economics. Available from: http://www.dummies.com/how-to/content/crossprice-elasticity-of-demand-in-managerial-econ.html [Accessed 21 October 2013].

Kennnon, J. (2011) What is difference between short-run and long-run. Available from: http://www.preservearticles.com/201106178119/what-is-the-difference-between-short-run-and-long-run-in-the-context-of-the-cost-curves-of-a-firm.html [Accessed 19 October 2013].

Osbome, M. (1997) Long run In an economy with production. Available from: http://www.economics.utoronto.ca/osborne/2x3/tutorial/LRCE.HTM [Accessed 19 October 2013].

Peavler, J. (2011) Price elasticity of demand. Available from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=price+elasticity+of+demand [Accessed 21 October 2013]

Riley, G. (2012) Long-run costs – economies $ diseconomies of scale. Available from:  http://www.tutor2u.net/economics/revision-notes/a2-micro-economies-diseconomies-of-scale.html [Accessed 20 October 2013].