Modelling of Money, Credit, and Banking - Essay Example

? Big Mac McDonald’s is the largest food chain of the world. It is present almost everywhere in the world. It has so wide global presence that decision makers often use the products of McDonald’s to devise economic measures of well being. One such measure is purchasing power parity. BigMac index is used to measure the purchasing power parity of various different currencies all over the world. Incidentally, this paper is also going to use Big Mac (a product of McDonald’s) and will consider various microeconomic and macroeconomic factors that determine its demand and supply. The paper will be purely economics and will make use of theories that were developed in the past and will apply them to the present scenario. The paper will be deductive in nature as it will test various theories that were developed sometime back. (Daft 1994) Big Mac was developed by one of McDonald’s earlier franchisees Jim Delligatti. The product in the early years was positioned as a burger with two beef patties. Later the product was positioned as a hip hop product which is liked by everyone. In 2004-2005, McDonald’s realized the importance given by people to the nutritional value of what they eat and they positioned the product as a “healthy product”. This is how McDonald’s has achieved high growth rate of the brand and achieved great sales. The product is a classic and has been churning in great amount of money for the company. Big Mac simply is a branded beef burger. It is positioned as a burger that is made from high quality beef. It falls under the umbrella brand of McDonald’s that leverages its position as compared to other beef burgers around. Although the positioning of Big Mac hedges it against competition yet it is not completely free from economic influences. Economic influences, both at macro and micro level, affects the burger’s demand supply and overall position of the company. (Anderson 1998) There are several factors that affect the demand and supply and profitability of the company. The greatest factor that affects the McDonalds and Big Mac’s demand is the level of income. The more income the people have, the more they are going to spend on their meals and in turn more money will be spent on Big Mac. In other words, as soon as national income of a country rises without any increase in tax or galloping inflation, the disposable real income of people also rises. They have more money in their pockets and as a result they can spend more money on Big Mac which generates high demand for Big Mac. The other factor that affects the demand of McDonald’s is the increase in population it is serving. For example, by opening up its branches in far flung areas and different countries, McDonald’s is increasing its customer count and as a result demand for Big Mac increases as McDonald’s expands. Another factor that directly affects the McDonald’s demand is the availability of alternatives. There are several hamburgers available but few have the same quality of value proposition as Big Mac. This affect has been created by constant marketing efforts. McDonald’s, as a result, enjoy a great position in the market and very few people compare McDonald’s with other street level fast food chains. Therefore, there are very few alternatives available and hence people cannot switch to other hamburgers. This results in constant and high demand for Big Mac. (Daft 1994) The profitability of any organization depends on high margins and volume. McDonald’s try to achieve both and therefore it is a very profitable company. McDonald’s maintains high margin by controlling its fixed and variable costs. There are specialized control systems being used at every branch level in order to control costs. Similarly, McDonald’s achieve high volume growth rate by constantly opening new branches and increasing its target market. This has resulted in high growth rate in production volume and hence McDonald’s achieves great profitability by achieving high volume and operating on high margins. (Brue & McConnell 2006) The firm currently operates in monopolistically competitive market because it is selling a differentiated product as compared to the competition. This differentiation is on the basis of its brand name and advertising campaign. Big Mac is a differentiated product as there is no other company producing the same quality of hamburger under the same name. The product is also different because of product wise branding and the overall company branding. Furthermore, millions of dollars are spent on the products advertising each year to keep it differentiated from other brands. Hence the company is operating in the monopolistically competitive industry. McDonald’s can remain in the same market structure as long as it position its products as different from what the competition has to offer. This can be done through subliminal advertising campaigns and improvement of the overall brand image. McDonald’s cannot shift its market structure to monopoly because there are several suppliers of food that are competing with McDonalds. Similarly, McDonald cannot shift to perfectly competitive structure because it would be less profitable to operate in that structure as McDonald’s will have to reduce its prices. Therefore, the current market structure is ideal for McDonald’s and it should sustain its position by focusing more on differentiating its brand name and brand image through advertising and improved consumer perceptions. (Brigham & Ehrhardt 2010) Big Mac can experience cross elasticity of demand. Big Mac’s substitutes and complements can affect the overall demand of McDonald’s. If there is a fall in the price of Big Mac substitutes there are chances that people will shift to the substitute if McDonald’s does not decrease its price. Similarly, a rise in the price of soda or fries is going to dampen the demand for Big Mac because the overall package would become expensive to them and they will search for new alternatives. Though McDonald’s demand is not perfectly price elastic, but still some change in Big Mac’s demand will occur following a change in the price of substitutes and complements. McDonald’s is using its resources pretty efficiently. It is cost competitive despite operating on such a large scale. McDonald’s is also experiencing economies of scale which is improving the efficiency further. The level of efficiency is so high that even the wastage of products after the waiting period does not affect the company’s profitability and it is on a continuous rise. Hence, McDonald’s is doing great in maintaining high levels of efficiency in the production of Big Mac. (Das & Teng 2000) Macroeconomic factors also have a bearing on the overall business style and position of a company. Economic growth tends to boost McDonald’s demand. The reason behind this is the fact that during the period of economic growth the overall demand for all the businesses increase and also the income of people increases. This leads them to spend more and this high spending yields great opportunity for all businesses and McDonald’s is also no exception. People tend to spend more money during the period of economic growth and hence more money is spent on food and people prefer buying from high quality brands during the periods of growth and hence economic growth affects the sales and profits of McDonald’s and Big Mac positively. (Roth & Kostova 2003) High unemployment level leads to low income level for the population. This means that people have less money to spend and hence less is spent on their food and clothing. Therefore, in the times of high unemployment, McDonald’s sales and profitability go down. During the period of high unemployment people would substitute Big Mac for a cheaper alternative irrespective of the quality offered by McDonald’s and other brands. Hence, unemployment and Big Mac’s sales tend to have a negative correlation. Galloping inflation rates reduce the purchasing power of money and people get poorer in real terms. During the periods of high inflation rate, demand for businesses fall. Big Mac sales would be low in the periods when the inflation rate is high because first the product will become expensive and secondly people will have lower disposable income. Balance of Payment deficit leads to devaluation of currency and everything becomes more expensive than before. This will reduce the demand for Big Mac and would also lead to low profitability for McDonald’s. It would follow the same phenomenon that occurs when the purchasing power of money falls. (Lipsey & Chrystal 2003) The impact of business cycles is similar to economic growth. In fact business cycles represent the overall picture of the economy. In a period of boom, the economy is growing and as a result all the businesses end up doing well. When there is a recession or trough all businesses take a hit on their profitability and production. Big Mac’s demand would be higher in booms and would decline in recession. It can be concluded from the above paper that both microeconomic and macroeconomic factors have an important bearing on the demand and supply of a company’s products. Therefore, all good businesses usually forecast the economic conditions and try to get ready for the situation before it is already on their heads. (Sloman 2003) Works Cited Anabtwi, I & Smith, G 1994, 'Modelling of Money, Credit and Banking', Eastern Economic Journal, vol 20, no. 3, pp. 275-290. Anderson, W 1998, 'A Pedagogical Note on the Open Economy IS-LM Model', The Journal of Economic Education, vol 19, no. 1, pp. 82-86. Brigham, E & Ehrhardt, M 2010, Corporate Finance, 5th edn, South-Western College, Chicage. Brue, S & McConnell, C 2006, Economics, McGraw-Hills, New York. Daft, R 1994, Management, The Dryden Publishing, New York. Das, T & Teng, BS 2000, 'Instabilities of Strategic Alliances: An internal Tension Perspective', Organization Science, vol 11, no. 1, pp. 77-101. Erden, D & Erden, D 1988, 'Impact of Multinational Companies on Host Countries: Executive Training Programs', Management International Review, vol 28, no. 3, pp. 40-50. Lipsey, A & Chrystal, M 2003, Economics, Oxford University Press, Oxford. Roth, K & Kostova, T 2003, 'Social Capital in Multinational Corporations and a Micro-Macro Model of Its Formation', The Academy of Management Review, vol 28, no. 2, pp. 300-315. Sloman, J 2003, Economics, Prentice, New York. Van Horne, J & John, W 2008, Fundamental of Business Finance, 13th edn, Prentice Hall, New York. Yadong, L & Shenkar, O 2006, 'The Multinational Corporation as a Multilingual Community: Language and Organization in a Global Context', Journal of International Business Studie, vol 37, no. 3, pp. 321-339. Read More