Products, Services and Prices in the Free Market

Essay by webbweenieUniversity, Master'sA, December 2008

download word file, 4 pages 0.0

IntroductionThe company chosen for this paper is McDonald's Corporation (McDonald's) and the product under consideration is the Big Mac™ sandwich. The discussion will focus on how McDonald's can meet their objective to increase company revenue using the economic concept of "Price Elasticity of Demand" to determine whether to increase or decrease the price. Next, consideration is placed on how the concept of "Income Elasticity of Demand" can be used to predict how the demand for the product would change with regard to a change in income of the customers. Finally, a presentation of the results of our research in the MarketLine Business Information Center database at the University of Phoenix Library will be provided.

Price Elasticity of DemandPrice changes affect the way consumers live on a daily basis. Adjusting a budget to stay within our means is pivotal as prices of elastic and inelastic goods change daily.

"The responsiveness (or sensitivity) of consumers to a price change is measured by a product's price elasticity of demand." (Brue & McConnel, 2004 p.356).

McDonalds is looking to increase their revenue by changing the price on one of its most memorable and successful products, the Big Mac. The objective is to determine if a change of the price for a Big Mac can be made that will increase total revenue for the company. Price elasticity of demand data will be used to construct a demand curve and a total revenue curve. From these data the company will compare the current price of a Big Mac and determine if the price can be raised or lowered such that the total revenue of the company is increased.

For example, see the demand curve and total revenue curve below in (Figure 1).

Figure 1The current price of a Big Mac sandwich is...