Effects of Financial Crisis on GDP - Kentucky Fried Chicken - Case Study Example

ECONOMICS AROUND US TABLE OF CONTENTS Introduction………………………………………………………………………………………………………………………………3 Fast food products………………………………………………………………………………………………………………………4 Elasticity and inelasticity……………………………………………………………………………………………………………4 UAE GDP…………………………………………………………………………………………………………………………………….9 Effects of financial crisis on GDP………………………………………………………….9 UAE Inflation……………………………………………………………………………...9 UAE Unemployment………………………………………………………………………10 Introduction KFC Corporation is also referred to as Kentucky Fried Chicken. It is a business chain that deals with fast food restaurants in the world. The Corporation is based in Kentucky, in the United States of America. The company specializes primarily in selling chicken pieces, salads, wraps, and sandwiches. Despite its specialization in fried chicken, the company also offers roasted and grilled chicken products. It has continued to set up branches in various countries all over the world where it has widened its production scope by incorporating the supply of pizza, hamburgers and kebabs. The market in which KFC operates in is characterized by foods and beverages that require fast service. Since most of the customers are always in a hurry, they should not spend too much of their time in the queues. The fast food industry observes the ability of customers to access the services provided easily. Therefore, the food outlets are located in major towns where the population can locate them without too much struggle. Customers in the food industries are known to make spontaneous changes to their already pre-booked orders. As a result, any fast food company ought to observe high flexibility in their services in order to meet the preferences of their customers (Bhasin, 2012). In reference to Bhasin (2012), the fast food industry is also characterized by social responsibility. For any company venturing into this field, it has to recognize the social responsibility and be accountable for the well-being of the society they serve. As a result, companies such as KFC ought to observe the optimum safety of the products they serve their customers. The fast food companies also uphold honesty and provide good working conditions for their employees. In conclusion, the fast food market is controlled by the large-scale industries such as McDonalds that enjoy economies of scale. As a result, the companies end up providing similar goods at a cheaper price thus making the competition high. Fast food products The market in which KFC operates in is a monopolistic competitive market. The market has an extensive global reach and the products supplied by KFC incorporate originality therefore assuring the company of an unrivaled market share. The flagship products supplied by KFC include The Colonels Secret Recipe Chicken. Subsidiary products such as sandwiches and coleslaw are unique in their way. Its affiliation with soft drink giants, and other fast food companies have ensured that it boasts of a wide product differentiation. In reference to Yaziji and Doe (2009), product differentiation is the process through which its products stand out amongst those of its competitors. Elasticity and inelasticity Elasticity is defined as a degree of responsiveness. It is the degree of how much a product changes when a change occurs in a factor influencing demand or supply. The elasticity of demand is a degree of how much a change in factors influencing demand affects the demand for a product. The three types of elasticity of demand include price elasticity of demand, the income elasticity of demand and cross elasticity of demand. Price Elasticity of Demand is defined as the degree of the change in product quantity demanded when the price of the commodity changes. In KFC, a reduction in the price of grilled chicken and hamburgers results in an increase in the quantity of the products sold. The Income elasticity of demand is a measure of the relationship between a change in the populations real income and the quantity of goods demanded. In reference to Pirnazar (2014), the income elasticity of demand is always positive for industries in the fast food market. For luxury goods, the income elasticity is significant exceeding +1. For the case of KFC, the income elasticity of takeaway products such as pizza is negative. However, in parts of the world such as in remote countries where fast foods are a luxury, an increase in the income of the population results in a positive income elasticity of demand of KFC products. In the case of inferior products from KFCs competitors, an increase in the income of the populace leads to a rise in demand for the inferior products. KFC has endured in a market where products from the inferior fast food companies are preferred by the public whenever their income rises. In first world countries such as United States of America, United Kingdom and Japan where the population is used to fast foods, the elasticity of products produced by KFC is less sensitive but still has a positive income elasticity to changes in the income cycle. The elasticity is as a result of an outward shift in the demand curve for products produced by KFC. The cross-price elasticity of demand is the degree in which the demand for a product responds to the demand for another related product as a result of a change in the price of the substitute goods.For Substitutes goods, a rise in the price of one product increases the price of another. In this case, the cross price elasticity remains positive.(Bhasin, 2012). A small change in the price of close substitutes results in a large change in the price of the other commodity. Complements goods are in joint demand. The stronger the relationship that exist between two products, the more is the co-efficient of cross-price elasticity. The cost of basic raw material has continued to escalate and, as a result, the price of various products such as chicken products and drinks has risen considerably. KFC has faced many challenges in terms of acquiring raw materials from many countries. A considerable rise in the cost of producing goods has resulted in a decrease in the supply of goods. An increase in raw materials cost causes the supply curve to shift leftwards, in turn increasing the product prices as shown below Price s2 s1 p2 E2 E1 p1 Q2 Q1 Quantity In accordance with the law of demand, an increase in the price of a product induces a reduction in the quantity demanded. As a result of the negative relationship that exists between the price and quantity of the product demanded, the demand curve slopes towards the bottom. The graph below shows that the quantity of KFC products demanded will decrease as an increase is induced by their price thus causing an upwards movement on the demand curve (Pirnazar, 2014). Price P2 P1 D Q2 Q1 Quantity Recently, KFC has formulated an internal supplies system that allows the company to export its finished products to regions of the world where supply has been deprived. As a result, the company lowers its cost of local production and, therefore, it can regulate the prices of its commodities. Due to government policies in some countries, the prices of raw materials such as chicken has been regulated by the governments. Such regulations increase the supply that in turn shifts the supply curve towards the right direction hence price reduction. The graph below clearly outlines the shift in the supply curve discussed above. Price MC P1 AC P2 P3 AR=D MR Q Quantity PART B UAE GDP The UAE is an Arab nation in the Asian continent that is made up of seven emirates. The Asian country is a tourism hub that receives most of its foreign exchange from the exportation of crude oils all over the world. In the year 2014, the country has a gross domestic product (GDP) of five hundred and seventy billion dollars. The country suffered heavily from the global financial crisis that started as a housing sector asset bubble in the United States of America. In 1973, the gross domestic product for the United Arab Emirates was 2.85 billion USD. In reference to Debnath (2010), the figure was the lowest ever. In 2012, the gross domestic product reached its highest figure of 383.80 billion USD. The GDP of this country has attained an average of 100.67 billion USD from 1973 to 2012. Due to the diversification of the economy, the GDP is expected to rise by a further 4.5 percent by 2020. Effects of financial crisis on GDP The United Arab Emirates relies heavily on crude oil exportation, which means that a change in the prices of oil on the market greatly affects the gross domestic product of the country. Up to around June during the year of the global crisis, the country enjoyed huge returns as the prices of oil, and other related products continued to escalate. However, the returns did not give much as the country had to spend more on food imports from African countries. The rise in the raw materials and food prices totally threatened the social stability and economy of the United Arab Emirates. In accordance with Arnold (2015), during the crisis, the oil companies in the country experienced a significant fall in the hydrocarbon receipts. The companies were also affected by the state of their terms of trade that continued to deteriorate. The gross domestic product greatly reduced as a result of the heavy losses in the oil sector. Following the collapse of Lehman Brothers, the United Arab Emirates’ GDP worsened as a result of the reduced oil prices. The country experienced high rates of unemployment during the crisis a situation that reduced the GDP figure further. UAE Inflation In reference to Bouyamourn (2014), the rates of inflation escalated by 4.3 percent in 2009 following the global financial crisis. Currently, the inflation is at 2.9 percent, and the figure is expected to rise to a further 5 percent in the future before falling back to its normal rates. However, following these estimations, the government has taken appropriate macroeconomic measures to avoid a possible boom-bust measures. UAE Unemployment The rate of unemployment in the United Arab Emirates measures the total number of citizens actively in need and looking for a job expressed as a percentage of the number of citizens contributing to the labour force of the country. The rate of unemployment in the United Arab Emirates was at its record lowest at 1.15 percent in 1985. Since then, the rate of unemployment has been at an average of 3. 12 percent until 2012. The figure was a significant decrease from the previous year that was at 4.60 percent. Unlike many countries that were affected by the financial crisis, the crisis did not have a significant effect on the existing rate of unemployment in the country. On the other hand, the financial crisis greatly affected the workers who fly into the country from other parts of the world in search of jobs. In reference to Ratha and Mohapatra (2009), the chances of a citizen in the country securing a job would be narrow as the dwindling growth rates continued to inhibit the creation of lucrative jobs. The financial crisis also had a great impact on the flow of tourism in the country. As a result, many individuals in tourism-related industries such as hotel and catering were left jobless due to compulsory layoffs. In accordance with Debnath (2010), the financial crisis resulted in a period of unemployment in the construction industry. Considering that this is one of the top economic pillars in the United Arab Emirates employing millions of workers, the standstill in the industry caused lack of jobs making the living conditions get even worse. References Arnold, T., 2015. Global crisis set to take toll on UAE economy. The National, 05 June. Bhasin, K., 2012. The All-You-Can-Eat KFC Buffer Is The Unicorn Of Fast Food. Business Insider, 25 October. Bouyamourn, A., 2014. UAE inflation rising at fastest level in five years. The National, 21 October. Debnath, P., 2010. The Impacts of the Global Economic Crisis on Migration in the Arab World. Middle East Institute, 18 April. Ratha D. and Mohapatra S., 2009. Revised Outlook for Remittance Flows- Migration and Development Brief no. 9. s.l.:World Bank. Yaziji M., Doe J., 2009. "Case illustration: PETA and KFC". NGOs and Corporations: Conflict and Collaboration Business, Value Creation and Society. s.l.:Cambridge University Press. Pirnazar, S., 2014. Microeconomics and the Laws of Supply and Demand. Principles of Microeconomics, 18 August. Read More