McDonald's to drop price by 6-15% as sales growth plummets

          

According to the article by Ratna Bhushan, the McDonalds which supplied food product have reducing the price in India by 6% to 15%. (http://articles.economictimes.indiatimes.com/2012-07-23/news/32804614_1_food-price-inflation-drop-prices-price-rationalisation). This situation will let the demand for McDonalds product increases as the price of the products has decreased. In the law of demand said, when the price changes, it will affect the movement along the curve only. For instance, the article shows the price is going down which will affect the movement along the curve to be downwards. This can be shown by the graph below:-

Graph 1.1 shows that the graph of law of demand which stated price at the vertical line while the quantity demanded at the horizontal line. The graph shows the inverse relationship between price and quantity demanded. It means that when the price higher, the quantity demanded will be decrease or vice versa. It can prove through this graph where the point A is moving downwards along the demand curve to the point B since the price of McD fall from 15% to 6%. It indicates that the quantity demanded will be increase when the point A moved to the point B as the price is decreasing.

Besides the law of demand, the article can be analysing through the change of demand. When some influence on buying plans other than price of the products changes, there will be a change in demand for that good. In another words, there will be a new demand curve if the determinants of demand other than price of the goods change. Those determinants occurred would affect the demand to be shifted right or left. When the demand increases, the demand curve will shift to the rightward while the demand decreases, the demand curve will move to the leftward.

In this article, there are few of determinants for the McDonalds products that can be determined. The assumption can be made by the prices of related goods which the substitute goods. A substitute defined as a good that can be used in place of another good. For instance, McDonalds have their substitute products which are Pizza Hut or KFC in India. These prices of related goods can be explained clearly based on the graph below:- 

Based on the graph 1.2, it shows the change in demand which affect the demand curve to be shifted. For instance, Pizza Hut is having the higher price which makes the quantity demanded of the pizza to be decrease. This situation would let the consumer go for the substitute products which is McDonalds that have cheaper price than the Pizza Hut. Thus, the demand for the McDonalds would automatically be higher since people are looking for McDonalds right now. This can be seen clearly in the graph above where the demand curve (D₀) is shifting to the rightwards which create a new demand curve (D₁). It can be conclude that, when the price of product increases, the quantity demanded will be decreases while the demand of substitute products will be increases.

            Besides that, the phenomenon happened in the article will affect the market equilibrium of McDonalds products. Basically when the price of substitute products of McDonalds, Pizza Hut is increases, the quantity demanded of McDonalds will be decreases which make the demand curve of McDonalds change since people are looking for McDonalds than Pizza Hut. However, the changes of demand curve will not affect the supply curve of the McDonalds products to be shifted rightwards or leftwards. Therefore, the point of market equilibrium will change. This can be seen in the graph below:-

 In this graph above, graph 1.3 it shows the point of market equilibrium for McDonalds has changed due to the demand curve have shifted to the right. Market equilibrium can be achieved as both consumers and suppliers are willing to buy and sell the McDonalds product at that equilibrium price and equilibrium quantity. The new market equilibrium in the graph shows that the demand has increases which imply that supplier to produce more McDonald’s product and consumer willing to consume more McDonalds than previous. This indicates the equilibrium price rises and the equilibrium quantity increases. That is how the graph of the market equilibrium works when the demand curve has shifted to the rightwards while there is no change in supply.

There will be another market equilibrium graph when the price falls, and the quantity demanded increases which affect the movement along the curve. Generally, according to the law of demand, as the price falls, the quantity demanded will increases which can be applied in the McDonalds products. This can be explained further in the graph 1.4 where the point D₀ move downward along the curve to the point D₁ since the price of McDonalds decreased from 15% to 6%. Therefore, it builds new market equilibrium at the point of D₁. When the quantity of demanded increases, it also will affect the supply curve to be shifted rightwards in order to achieve the new market equilibrium. As can be seen in the graph, the surplus at the pink shaded region does occur when the original point D₀ less than the point S. The surplus happened when the supply more than demand (S > D). 

           Next, the phenomenon happened to the McDonalds products can be analysed by their elasticity itself. Elasticity is a measure of the people responsiveness of people to changes in economic variables. When the price of McDonalds products falls, the quantity demanded will increase and the total revenue will definitely increases. This can be seen in graph 1.5, as time goes by, when the price of McDonalds keep decreases, the quantity demanded will be decreases. As a result, the demand curve will be downwards sloping. Thus, the demand is elastic. Besides that, there are other determinants of elasticity that can be applied in the McDonald’s products. For instance, the McDonald’s can be assumed as the luxuries as we do not need to depend on the McDonalds products. In other words, the McDonalds products are an elastic demand.

        Therefore, when the price of McDonald’s products falls, it will affect the demand and supply. Besides that, the elasticity of McDonalds also will be affected.