Business Proposal: McDonalds

Business Proposal
Charisse Brown
Economics/561
Prof: Assefa Muluneh
Business Proposal
Proposed Business
McDonalds is one of the most respected companies in the food industry (McDonalds, 2015). The company provides a variety of food choices for its customers ranging from sandwiches, salads to beverages. The company also offers breakfast in their menu. It has always been the company’s objectives to share in the happiness of its customers by providing a variety of food and drinks needs that would meet the expectations of the customers. The company has also considered the needs of children by including some foods in the menu that can be purchased for children. However, McDonalds has failed to provide an appropriate breakfast option for children. In its happy meal option, designed for children, some of the available meals include yogurt, snacks and a variety of juices. The company has managed to provide children’s food with 25% less sugars as compared to the available substitutes in the market (McDonalds, 2015). The company ought to design a breakfast menu for children. By including child sized portions items in the children breakfast menu, the company would attract more customers, increasing its revenue generation.
Market structure
McDonalds operates in a market structure exhibiting the features of monopolistic competition. The market is characterized by few players in the market, with minimal barriers to entry in the market as the players have differentiated their products in ways such as taste quality and customer services that cannot be easily copied by any potential party seeking to enter the market (Mankiw, 2014). The consumers in the market have substantial knowledge of the good and services provided by the sellers and the prices of goods and services are determined by the market forces of demand and supply. McDonalds’ products are elastic, meaning that a small change in the prices results to a corresponding change in the quantity demanded of the products and may result in customers shifting to other close related products from other companies. An elastic demand has a positive and greater than one coefficient, which is derived by dividing the change in quantity sold, by the corresponding price change (Mankiw, 2014). An elastic product may be considered a luxury, and therefore, the prices of such products should be reasonable not to scare away the customers and to guarantee revenue generation. By raising the prices of its products, McDonalds will experience a decrease in the sale and vice versa. Considering the competition in the market it operates under, the company would have to charge lower prices than its competitors, in order to stay competitive in the market.
Elasticity of the Product and How Pricing Relates To Elasticity of the Product
Accordingly, pricing will be a vital marketing strategy for the company when introducing the breakfast menu for children (Pride, & Ferrell, 2010). When pricing its products, McDonalds will utilize the concept of marginal cost= marginal revenue besides putting the issue of the degree of elasticity into consideration, which is important in informing the degree of increasing or reducing the prices. For instance, the prices of the company’s products can be raised up to the point where the quantity demanded would start decreasing as customers shifts to other cheaper alternatives. If at $5, the quantity demanded of Happy Meal is 20, and by increasing the price to $8, the quantity demanded is 15, the elasticity is calculated as [(Q2-Q1/Q1) Q1]/ [(P2-P1/P1) P1]=[(15-20/20)20]/ [(8-5/5)5]= -18 (Mankiw, 2014). The elasticity of -18 means that when the company increases the price by $3, it would result to a decrease in the quantity demanded by 18% and vice versa. In a competitive maker, a small change in prices, cause a huge change in the quantity demanded. For McDonalds to increase sales, it will have to reduce the prices to attract more customers.
How Changes in the Quantity Supplied As a Result of Pricing Decisions Affects Marginal Cost and Marginal Revenue
McDonalds needs to utilize the concept of marginal cost and marginal revenue in identifying the best scale of production that would maximize profits generation. As the company increases its quantity supplied owing to a decrease in the prices, there would be increases in the cost of production resulting from each unit increase in the quantity produced (Bhattacharyya, 2006). This refers to marginal cost. They result from increases in variable costs of labour, breakages, raw materials and other expenses such as discounts. Increase in addition units of sales will also results to increase in marginal revenue, the revenue derived from additional unit sale. For the company to maximize profits, it has to operate at the position where the marginal revenue equals to zero. At this point, any additional production would result in losses. Increasing the prices of the products will result to increased marginal costs and decreased marginal revenue. However, producing large quantities has the advantage of economies of scale characterized by increased efficiency pertaining to the utilization of fixed costs such as the costs of machinery and the premises, which tend to remain constant even with the increase in the level of production (Bhattacharyya, 2006). To understand the concept of marginal costs and marginal revenue for introducing a happy meal breakfast at McDonalds, the table below provides a clear understanding of the level of operations.
Unit of productionFixed costsVariable CostsMarginal Total Variable costsTotal Marginal Revenue (Total Revenue –marginal costs)
at a price of $5/unit11002-32100426310062941008214510010215610012217710016219810022218
Nonpricing Strategies
McDonalds can find other ways apart from pricing strategy, through which it can attract customers. These include promotional campaigns such as giving discounts for large quantity purchases, and advertisements through media familiar among children. Strategies will increase the company’s presence in the market by helping it expands its market base (Pride, & Ferrell, 2010). Coupled with the pricing strategy, the nonpricing strategies will help McDonalds generate more profits, which can be utilized to expand the firm’s operation, offering a considerable competition to its close competitors. Through its expanded scope of operation, the company will benefit from the advantages of economies of scale, which will become a barrier of entry for other potential competitors. However, the expansion of the company and the use...