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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

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

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.

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-meetchanging-demand.html