Businesses like McDonalds need to be aware of changing trends, to ensure that they are running the business to its full potential and are not losing customers. More and more people are becoming more conscious about what they eat due to the increasing obesity figures. Therefore they are going elsewhere for fast food. The main outlet that these customers will go to is Subway. Subway only began to open in the UK in the last 2 years, but has since expanded so much that there are numerous restaurants in each town throughout the UK. The appeal of subway is their fresh ingredients that are put on your sandwich there and then. Each sandwich is tailor made for each customer which allows for them to be more satisfied and be able to make healthier options. Because of subway, McDonalds have recently begun to sell deli sandwiches which are very similar to subs sold at subway. By doing this they are keeping up with the competition.
This is one of the factors that determine demand in McDonalds. There are many factors in a business that determine supply or demand. If the business doesn’t listen to them then they are at risk of being unsuccessful. Demand can be defined as the amount consumers desire to purchase a good at various alternative prices, it reflects the degree of value consumers place on items, for example how much they want it for the price that is put on that product. Supply is different to demand, supply depends on the business rather than the consumer. It can be defined as - the amount producers are willing to offer for sale at various prices, it reflects the cost of the resources used in production and the revenue required to make decent profit or returns.
Other factors determining supply and demand include –
Supply
- Price
- Technology
- Natural changes, i.e. if natural materials become unavailable
- Cost of production
- Social factors
Demand
- Changes in consumer tastes and preferences
- Income levels
- Price
- Quality
- Availability
- Promotion
The supply and demand schedules explained
Demand Schedule
Market demand consists of the sum of all individual demand schedules in the market, this is Represented by a demand curve. Basic assumptions made about the demand schedule is that at higher prices, consumers generally willing to purchase less than at lower prices. The Demand curve is a negative slope, downward sloping from left to right
The demand curve slopes downwards from left to right. It shows demand will be higher at lower prices than at higher prices. As price falls, demand rises. As price rises, demand falls. By following the lines drawn on the diagram you can see this, follow the £5 price down to the quantity and you can see it is 150.
Changes in any of the factors other than price causes the demand curve to shift either: Left (Less demanded at each price) or Right (More demanded at each price)
Factors Determining Consumer Demand
- The growth in obesity has lead to certain foods and drinks being banned from schools. This growth in healthy living and the growing need for exercise has changed the nation’s view of fast food. In relation to fast food, peoples tastes are changing and they want more fresh and healthy food which is readily available at McDonald’s new competitor subway. Subways prices are the same as McDonalds but since they opened it has caused the demand schedule to change for McDonalds, thus increasing the demand for subway. Here is an example of the demand schedule.
McDonalds Subway
- Income – if peoples income levels rise then they can afford to eat out more regularly and therefore demand for McDonalds would increase, however if they had so much money then they may consider McDonalds to then be inferior and decide to eat elsewhere therefore making the demand less.
High income (eat more McDonald’s) High income (eat elsewhere)
3. Special offers – often McDonalds use special offers to boost sales in certain products. This includes buy one get one free Big Macs. These are essentially price changes and therefore cause movements along the demand schedule. Here is an example of how a special offer can cause demand to change –
The first time McDonalds had a special promotion on the Big Macs; they underestimated its popularity and therefore run out of the product. This caused people to change their mind about going to McDonald’s altogether and go to somewhere like subway. Here is what the demand schedule would look like if this happened –
McDonalds Subway
4. Promotion – making people aware that a product exists costs money but if it works and makes people buy the product then they can recoup the profits to outweigh the costs. This would be how the demand schedule would change after a UK wide TV advert –
Supply Schedule
Changes in any of the factors other than price cause a shift in the supply curve.
-
A shift in supply to the left – the amount producers offer for sale at, every price will be less
-
A shift in supply to the right – the amount producers wish to sell at, every price increases
The supply curve slopes upwards from left to right indicating a positive relationship between supply and price. As price rises, it encourages producers to offer more for sale whereas a fall in price would lead to the quantity supplied to fall because consumers aren’t buying them; therefore the cost to produce isn’t worthwhile for the profit and returns.
Changes in any of the factors affecting supply other than price will cause the entire supply curve to shift. A shift to the left results in a lower supply at each price; a shift to the right indicates a greater supply at each price.
Factors affecting supply
- Research and development – McDonald’s uses research and development top create new product ideas. Therefore they need to spend money on research and development to ensure that these new products match the needs of the target audience and will increase profits. Here is a supply schedule for McDonalds products after a drive thru has been implemented after the results from research and development –
- Technological change – new technology causes businesses to update their equipment constantly which enables them to work better and increase output, thus increasing the products available which has a knock on effect of profits. The technology essentially enables things to get done quicker. Here is a supply schedule for McDonalds if they got new cookers and were then able to increase output –
- Product Design – McDonalds use seasonality to change product design and to introduce new products, they also use changing trends to change product designs in a hope to win over the competitors. McDonalds have introduced new deli sandwiches which are essentially the same model that subway use, in a hope that the customers that McDonalds lost to subway will come back to McDonalds. Therefore supply for McDonald’s products would increase because of deli sandwiches. It will look like this –
Market Mechanism
If a market is in surplus then manufacturers and retailers will have excess stock which they will need to clear. This can be done by reducing the price to tempt the customer to buy the last of the stock that has now been discontinued. Sometimes there will be shortages in markets, whether it is because some of the materials that are needed to make the product are unavailable or be because it is a seasonal product. On these occasions the demand will be greater than the supply, so the manufacturer or retailer will need to raise the price to even it out, this way only the people who really need or can afford the product will purchase it.
The speed in which a market can clear its surplus stock can vary. For example in the past 12 months, electricity and gas prices have soared. As a result of this, consumers may wish to use a cheaper, alternative energy source. This can take time however, because either the energy isn’t yet available or it is too expensive at the moment to use. Some markets can clear very quickly, they are usually supermarkets. If some food product is at the end of its life cycle and is going out of production then the price would be reduced until the products are all gone, this would happen quickly because consumers would be more interested in the product at a lower price.
All markets aim to be in equilibrium where the supply and demand are equal (shown on diagram at E). This means that if demand is at 600 then supply is also at 600, so for every consumer wanting the product is able to purchase it. In reality most companies are not in equilibrium and have stock shortages when supply is less than demand. For example in McDonalds, there are numerous products that use bread baps in production of the meal. If a McDonalds outlet is let down by its suppliers and doesn’t have enough bread baps for the demand of sandwiches or burgers that day then they will have to turn away customers because the supply and demand are not equal.
Some companies however don’t wish to reach equilibrium at the beginning of the products introduction. For example, when Sony released the psp in September last year, they only produced and released a small quantity of the products. This way the demand outweighed the supply. The shortage in the market would drive up prices as some consumers are prepared to pay more. This allowed Sony to increase prices and make more revenue. The price will continue to rise until the shortage has been completed and a new equilibrium point has been reached.
Consumer representation
Consumers in the UK today have much more disposable income. Therefore they have more money to spend on more products and services that they wouldn’t have been able to buy 20 years ago. Despite lots of consumer legislation, there is still need for consumer representation for when things go wrong. For example if you go see an advert for a high chair in a catalogue for £19.99 and then go to buy it and get told it is actually £99.99 and it cant be purchased for any less even though the advert clearly states the lower price. This is wrong and comes under the trades descriptions act. If the company refused to offer it at the lower price then consumers can seek help from numerous sources. I have labeled and explained them below –
- Office of fair trading (OFT) – The OFT's job is to make markets work well for consumers. Markets work well when businesses are in open, fair and vigorous competition with each other for the consumer's custom. Their job is to make sure that consumers have as much choice as possible across all the different sectors of the marketplace. When consumers have choice they have genuine and enduring power. As an independent professional organisation, the OFT plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive. They have three main operational areas within the office they are - Competition Enforcement, Consumer Regulation Enforcement, Markets and policies initiatives.
- Citizens Advice bureau - The Citizens Advice service helps everyday people and citizens resolve their legal, money and other problems by providing free information and advice from over 3,200 locations, and by influencing policymakers. Citizens Advice is a registered charity which relies on over 20,000 volunteers and need to raise funds to provide these vital services. The majority of their advisers are trained volunteers, helping people to resolve over 5.6 million problems every year. Citizens Advice also co-ordinates social policy, media, publicity and parliamentary work and maintains an information and advice website at www.adviceguide.org.uk
- Trading Standards - Trading Standards is a company in the UK which offers a wide range of consumer related legislation, covering areas such as fair trading, product safety, and environmental controls. Trading Standards Officers enforce a wide range of consumer related legislation, for example the Consumer Protection Act 1987, Weights and Measures Act 1985, the Trade Descriptions Act 1968 and the Consumer Credit Act 1974.The job can involve things like visiting premises to ensure that everything is legal whilst giving advice to traders and consumers, and investigating complaints of breaches of legislation.
- Consumer association (eg. Which?) - Which? Fights for consumers' rights in two ways. They campaign to make sure consumers get treated fairly. And they publish magazines, books and websites to help people make the right choice for them. Which? Magazine was launched in 1957 by Consumers' Association, an independent charity. Following a review in 2004, the whole organisation now works under the Which? name.
- TV (Watchdog) – Watchdog is a BBC television series that investigates viewers' reports of problematic experiences with traders, retailers, and other companies around the UK. It has had great success in changing the awareness consumers have of their purchasing rights and in changing policies of companies, closing businesses down and pushing for law changes.
Conclusion
Within the UK, consumers purchase a wide variety of products and services on a regular basis. Economists can depict levels of demand for each product and service using the demand schedule. Likewise they can depict the quantity a supplier is willing to sell at each price level using the supply schedule. Within the UK there are a wide variety of markets. Ideally these markets should be in equilibrium i.e. demand=supply. In reality however, many of these markets are not in equilibrium but the market mechanism is used to clear them. As consumer income levels have increased so has the quantity of goods and services that consumer buys. To prevent them from being exploited the government has created a number of protection organizations whose roles vary and will be discussed in more detail in section 2 of this report.
