McDonalds

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McDonalds

• Steve DEmidio, Angela Lattanzio, Meghan Skiff,
  Andrew Snyder

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Table of Contents

• Meghan-
• History
• Land, Labor, Capital
• Opportunity Cost
• Angela-
• Ceteris Paribus Factors for Demand
• Price Elasticity of Demand
• Consumer Choice

• Andy-
• Law of Diminishing Marginal Returns
• Profit Maximization
• Monopolistic Competition
• Steve-
• Price Discrimination
• Labor Market
• Discrimination in Wages

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History

• 1954 52 year old Ray Kroc, a salesman of the
  multi-mixer milkshake maker traveled to San
  Bernardino, California to visit two brothers,
  Dick and Mac McDonald who were using eight
  multi-mixers in their restaurant.
• http//www.mcdonalds.com

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• Upon his visit, he was impressed with the
  timeliness of operations within the restaurant.
• He convinced the brothers that they should open
  additional restaurants all over the country.
• http//www.McDonalds.com

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• 1955 the next McDonalds restaurant opened in Des
  Plaines, Illinois.

• 1963 Ronald McDonald made his TV debut, and was
  depicted by Willard Scott.
• http//www.mcdonalds.com

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• 1965 The company joined the New York stock
  exchange.
• If you had purchased 100 shares valued at 2,250
  in 1965, you would now have 74,360 shares, worth
  2.8 million dollars.
• http//www.mcdonalds.com

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• 1968 Jim Delligatti, a Pittsburgh franchisee
  invented the Big Mac.

• 1973 Herb Peterson, another franchisee created
  the Egg McMuffin.
• http//www.mcdonalds.com

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• 1974 Fed Hill of the Philadelphia Eagles and
  McDonalds opened the Ronald McDonald house, where
  sick children were given a friendly and fun place
  to live while receiving treatment for their
  illnesses.
• http//www.mcdonalds.com

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• 1998 McDonalds joined the World Wide Web with
  the launch of www.McDonalds.com.

• 1979 the Happy Meal (along with a toy surprise)
  was added to the menu.
• http//www.mcdonalds.com

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Land

• The physical space where production takes place
  and the natural resources found under or on it.

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McDonalds and Land

• McDonalds can be found virtually everywhere from
  airports to malls, neighborhoods, colleges, toll
  ways and more.
• McDonalds has a list of specific land criteria
  that must be met in order for a restaurant to be
  built on it.
• http//www.mcdonalds.com

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Site Requirements

• 32,616 square feet is the minimum square footage.
• Corner or corner wrap with signage on two major
  streets.
• Signalized intersection

• Ability to build up to 5,500 square feet of
  building at any time.
• Parking that will meet parking codes.
• Ability to build to a minimum height of 22 ft.
  www.mcdonalds.com

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Labor

• The time human beings spend producing goods and
  services.

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McDonalds and Labor

• Time to build a new McDonalds
• 3-3 ½ Months
• Time to make a hamburger from start to finish
• 30 seconds

• Time to make french fries
• 3 ½ minutes
• Time to make a milk shake
• 25 seconds
• http//www.mcdonalds.com and McDonalds employee
  Dave Divelbliss

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Capital

• Long lasting tools people use to produce goods
  and services, including physical capital and
  human capital
• Physical capital includes buildings, machinery,
  and equipment.
• Human capital includes the skills and training
  that the workers possess.

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Physical Capital

• There are 30,000 McDonalds restaurants in 141
  different countries around the world.
• www.mcdonalds.com

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Human Capital

• Managers are trained at Hamburger University in
  Oak Brook, Illinois.
• 65,000 managers have graduated from Hamburger
  University.
• Hamburger University also has branches in
  England, Japan, Germany, and Australia.
• McDonalds Employees are properly trained within
  30 work days or 100-120 hours.
• http//www.mcdonalds.com and McDonalds employee
  Dave Divelbliss

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Opportunity Cost

• The value of the best alternative that must be
  given up in order to get something.
• Price equals what you give up divided by what you
  get.

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Opportunity Cost

• Average time spent going through the drive thru
  at McDonalds 110 seconds.
• Average time spent at the Texas Road House 50
  minutes.
• what you give up
• what you get
• 1 meal at Texas Road House 27.27
  meals at McDonalds
• Therefore, the opportunity cost of eating at
  the Texas Road House is higher.
• McDonals employee David Divelbliss and former
  Texas Roadhouse employee Angela Lattanzio

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Ceteris Paribus Factors of Demand

• Income of Consumers
• Prices of Related Goods
• Taste
• Number of Consumers in Market
• Expectations of Consumers

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Income of Consumers

• As Income ?, Demand of Inferior Goods ?

• As Income ?, Demand of Normal Goods ?

• McDonalds provides an normal good to consumers.
  Therefore, as income increases, demand for
  McDonalds food will also increase, shifting the
  demand curve to the right.

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Income of Consumers

• Compare
• Meal _at_ McDonalds- 1 Quarter-pounder w/ cheese
  value meal, 3.79
• Meal _at_ Olive Garden- Tour of Italy Entrée, 13.50

Consumers with relatively smaller incomes will
have a greater demand for McDonalds food.
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Prices of Related Goods

• Substitutes
• - good that can be used in place of some other
  good, fulfills essentially the same purpose
• ex. other fast food (Wendys, Burger King,
  etc.), ground meat from grocery store, food from
  other restaurants
• - price of substitute ?, demand for McDonalds
  food ?

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Prices of Related Goods

• Complements
• - good that is used together with some other
  good
• ex. french fries, condiments, etc.
• - price of complement ?,
• demand for McDonalds food?

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Taste

• Includes feelings of consumers about product, as
  well as about other goods and services competing
  for the consumers dollars.
• A change in taste results in a change in demand.

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Taste

• Tastes for McDonalds are affected by factors
  such as the number of working parents in the
  area, public concern for health/weight, location
  of the store (ex. college town), value placed on
  consumers time, etc.

• Americans tastes are changing.instead of
  fatty roasts and steaks, consumers are favoring
  leaner ground beef. McDonalds, as well as
  Americas cattle ranchers, must change to meet
  the changing demands of consumers.

www.sierratimes.com
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Number of Consumers in Market

• Can include population, as well as the income and
  social class of people living in an area.

• Although McDonalds provides a normal good,
  because it is an inexpensive and time-efficient
  product, the number of consumers will increase in
  lower-income and highly populated areas, as well
  as in college towns. Number of consumers will
  decrease in upper-class areas, and in rural areas
  where population is smaller.

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Expectations of Consumers

• Expectations of future events change demand,
  resulting in a difference in when consumers buy,
  as well as how much they buy.

• If buyers expect prices to rise, they will
  purchase more of the good now, shifting the
  demand curve to the right.
• If buyers expect prices to fall, they may wait to
  take advantage of the lower price later, shifting
  the demand curve leftward.

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Expectations of Consumers

• On January 30, 2002, in Tokyo, McDonalds Japan
  announced that, beginning February 14, the
  company would end its weekday discount campaign.
  Among other costs, regular hamburger prices would
  rise to 80 yen.
• From this price increase, we would expect demand
  to increase as consumers hurry to buy while lower
  prices are still in effect.

www.cnn.com
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Price Elasticity of Demand

• change in QD caused by a 1 change in P as we
  move along a demand curve from one point to
  another

• Sensitivity of quantity demanded to changes in
  price
• All other factors must remain constant

ED ?QD / ? P
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Price Elasticity of Demand

• Depends mainly on
• Number and closeness of substitutes
• More substitutes more elastic
• Fewer substitutes less elastic

• For a family of four, ED 1.230. Therefore, if
  price increases by 10, quantity of sales
  decreases by 12.30.

Consumer Demand in the United States, Houthakker
and Taylor, 1970.
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Consumer Choice

• Budget Constraint - combinations of goods and
  services the consumer can afford with a limited
  budget, at given prices.
• Maximizing Utility - utility, the pleasure
  attained from consuming a good, is a major factor
  in determining how much a consumer will buy.
• ex. children attain utility from Happy Meals

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Consumer Choice
Preferences - depends on income, price of good,
prices of substitutes and/or complements
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Law of Diminishing Marginal Returns

• The law of diminishing marginal returns states
  that as we continue to add more of any one input
  (holding the other inputs constant), its marginal
  returns will eventually decline.

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How it applies to McDonalds

• As McDonalds puts money into an input such as
  adding the number of pickles on a burger, the
  marginal returns and profits will decrease.
• The restaurant must decide the amount of each
  input that will result in a profit.
• Three pickles for every burger is more desirable
  than four or more because McDonalds will save
  money.

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Profit Maximization

• The total revenue and total cost approach
• The firm calculates ProfitTotal Revenue minus
  Total Cost at each output level and selects
  where the output level where profit is
  greatest.
• The marginal revenue and marginal cost approach
• The firm compares MR and MC. If MRMC, the
  firm should produce more. If MRshould produce less.

Hall and Lieberman. Economics Principles and
Applications
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Profit Maximization

• For the quarter ended, September 30, 2002,
  McDonalds Corporation had a Total Revenue (TR)
  of 4,047,000,000 and a Total Cost (TC) of
  3,217,200,000. Using the Total Revenue Total
  Cost approach, McDonalds profit for the quarter
  ended is 829,800,000.

United States Securities and Exchange Commission
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Monopolistic Competition
- Has elements of both monopoly and perfect
competition.

• Monopoly elements
• Producing differentiated products.
• Face the market demand curve (downward sloping).

• Competitive elements
• Large number of buyers and sellers.
• No barriers to entrance/exit.

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Monopolistic Competition

• Because consumers perceive products to be
  different under monopolistic competition, firms
  can raise prices and only lose some customers.
• Others will stay with the firm because they like
  its product.
• Thus, a monopolistic competitor faces a downward
  sloping demand curve.

P
Q
Hall and Lieberman. Economics Principles and
Applications.
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Why is McDonalds Monopolistically Competitive?

• In the fast food market, there are a large number
  of firms producing, and a large number of
  consumers who want the firms product. Consumers
  perceive each of those firms as being different.
  For instance, McDonalds, Burger King, Wendys,
  and Shortys all sell burgers, but a consumer may
  prefer McDonalds over Burger King, Wendys, and
  Shortys, etc.

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Price Discrimination

• Charging different prices for the same product or
  service when the differences in price do not
  reflect differences in costs

• Charging the same price for a product in
  different markets when differences in costs exist

Hall and Lieberman. Economics Principles and
Applications
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Two meal options

• A McDonald's extra value meal consisting of a
  Crispy Chicken sandwich, medium soft drink, and
  medium fries has price of 4.19.
• A meal composed of the exact same items, but
  purchased separately has a total price of 4.69

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• These same products are offered at two different
  prices but cost the same to produce
• Value meals are more appealing to people with a
  more elastic demand.

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Requirements of Price Discrimination

• Downward sloping demand curve for the firms
  output
• The firm must be able to identify consumers
  willingness to pay more
• The firm must be able to prevent reselling of
  low-priced product to higher paying consumers

• As the price of a product falls consumers are
  willing to buy more of that product

Hall and Lieberman. Economics Principles and
Applications
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• Approximately 85 percent of McDonald's
  restaurants are locally owned and operated.
• Each individual determines his or her own prices
  by taking all their costs into consideration.
• Therefore, prices do vary from one McDonald's
  restaurant to another.

www.mcdonalds.com
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Labor Market

• Employment in the Fast-food labor market appears
  to be dominated by non-teenage labor.
• The mean age of the employees is 23 years
• Employment in fast-food is also predominately
  African American (58) and female (56 ).
• cber.nlu.edu/DBR/dbrissu2/ei3.htm

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Labor Market

• McDonalds trains so many people each year that
  theyve surpassed the U.S. Army as the nations
  largest training organization

• With an average restaurant staff of 50 people and
  more than 23,000 restaurants McDonalds employs
  1,150,000 people at any one time some 650,000 of
  them in the United states alone

www.mcdonalds.com
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Discrimination in Wages

• Occurs when the members of a group of people have
  different opportunities because of
  characteristics that have nothing to do with
  their abilities.

Hall and Lieberman. Economics Principles and
Applications
49

• Entry level positions (part and full time) start
  at minimum wage with possibility of a raise every
  six months
• If, at entry level, the candidate elects a work
  any time work schedule he/she will start at
  6.00 an hour

• Personal interview with anonymous manager

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• Managers wages range from 7 -35 an hour
• There are two types of managers each has a wage
  that reflect their responsibilities
• Swing 7-25 an hour
• Salary 25-35 an hour

• The manager with most seniority present during
  the working hours is responsible for the entire
  store
• Swing managers may represent the store in absence
  of a Salary manager including work hour
  scheduling and task assignment
• only Salary managers may distribute pay or deal
  with an employees pay in any way

• Personal interview with anonymous manager

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• McDonalds is an equal opportunity employer.
  Rates of pay and conditions or privileges of
  employment are established and granted without
  regard to race, color, religion, age, gender,
  national origin, disability, or ancestry.

• McDonalds also has the largest number of
  minority and female franchisees in the fast food
  restaurant industry. Plus, 60 percent of those in
  training to be franchisees are minorities or women

www.mcdonalds.com
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In conclusion

• McDonalds is a firm that utilizes many of the
  economic principles that we have learned in order
  to make wise and profitable business choices. As
  a result, it has become the successful
  international business that we know today.

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Any questions???