McDonald

The markets can be classified into four types of market structures :-

• monopoly
• perfect competition
• monopolistic competition
• oligopoly

initially markets were categorized by economists between two extremes, monopoly and perfect competition.In perfect competition there many producers offering the identical products at the same price level. the price can be only determined by the market forces of demand and supply. this implies that the firm has no power over the market price, which means its a price taker.on the other hand monopoly is a single firm that controls the market. since they either have government support, control over a resource or got legal protection they have the advantage of regulating the market price, making them a big problem to majority of society and potential new businesses (high barrier to entry). Oligopoly falls under these extremes with its characteristics more towards monopoly than a perfect competition. since there are a few firms that are able to dominate the market for the product or service they offer. they provide products that are similar to their rivals but are differentiated through advertising and promotions.

Monopolistic competition is considered to be under these two extremes, but more closer to the competitive side since it can be categorized as having large number of producers selling slightly differentiated goods. Furthermore entry barriers are very low. Also since firms in monopolistic competition offer slightly differentiated goods they have some degree of price making power

today ill be taking McDonald as an example to clearly explain the concept of monopolistic competition through the application of actual events.
As you all know McDonald is a global fast food chain that originated in America with more than 34000 restaurants in 118 countries serving nearly 69 million people a day (McDonald 2013). McDonald is classified as a monopolistic competition because  in the fast food business there are many other competitors as well. For instance Wendy's also provide burgers and fries, but are slightly differentiated from McDonald. in the sense of taste or how it is prepared. lets say McDonald decides to increase the price of its cheeseburger which initially costs $0.99 (Burger Lad 2013) to $ 1.50 while Wendy's price stays the same. This means that McDonald customers might switch to having their food at Wendy's, while some loyal customers remain. This is  the behavior of a downward sloping demand curve that monopolistic competition face. As price increases quantity demanded decreases, while as price decreases quantity demanded increases. It is evident that there is an inverse relationship between price and quantity demanded for an individual firm.

They also have a relatively elastic demand curve.Elasticity is the degree of responsiveness to a change in price(Mankiw.N.G 2004),being elastic means that McDonalds customers are quite sensitive to price changes made to the burgers.  This is because McDonald has to face competition from reasonably close substitutes like Wendy's or KFC who are also well to do fast food restaurants. However demand for McDonald is not perfectly elastic because as explained in the above example when price of a cheese burger rises some customers are quite sensitive to the price change and may switch to a different restaurant,but not all meaning to say that the loyal customers will remain regardless of price change.This implies that the demand curve is not perfectly elastic.

Short run

The demand curve for McDonald is downward sloping in contrast to perfectly elastic horizontal demand curve seen by an individual firm in perfect competition. It looks like a monopoly's demand curve where the firm sells small amounts of quantity at high prices and large amounts of goods at lower prices. Next we shall examine the marginal revenue (MR) for McDonald.According to Long.N (2013) marginal revenue is the amount of revenue a firm obtains from each additional output.since it is a single price seller it would be difficult for them to discriminate price due to the fact that they don't have much monopoly power over the market. so McDonald marginal revenue will be below its demand curve. This means that at any level of output the firms marginal revenue will be lower than the price it sells its burgers for. so following the profit maximizing rule of MC=MR McDonald will want to produce at a quantity where MR=MC which is denoted by Q on the graph above. plus it can charge a price that corresponds with demand for the burger. to find the priced charged by McDonald you should go above MC=MR towards the demand curve and over to the price axis. and to determine whether or not McDonald is earning economic profits we go up to average total cost curve and over to the price axis therefore by studying the graph we can see that McDonald earns $ 10 economic profit ($1.5*10-$0.5*10)

Long run

Lets say McDonald decides to open up a store in a town where there is currently no fast food outlets they might experience economic profits because of their highly differentiated food, as you can remember one of the characteristics of monopolistic competition is low barriers to entry. This means that if McDonald which is one of hundreds of other restaurants in the town so it is not a monopoly, its providing food just like the rest of the other restaurants but their burgers in particular are helping them earn economic/super-normal. due to this we would expect more fast food joints to be attracted to this town. as they do demand for McDonald burgers will fall this is due to fact that now there is more competition in the market for burgers and fries. now we could see that there are more substitutes available for customers to choose from. the number of substitutes is the primary determinants of price elasticity,therefore McDonald will face a elastic demand curve. Along with demand marginal revenue (MR) will fall as well. MR and demand are equal at a level of output of one therefore MR shifts to the left downwards and becomes flatter. how do we know this, as we can see McDonald is not earning a economic profit. lets examine why 

McDonald would want to produce its burgers at the profit maximizing output of MC=MR but looking the graph wan see that its at a lower level where quantity has decreased to 5 burgers from the original 10 burgers due to fall in demand. Now McDonald can only charge their customers $0.5 per burger because there is more competition and customers are more responsive to McDonald prices as there are various substitutes. so by looking at or graph we can see that McDonald cannot earn economic profit because their price equals their average total cost (ATC) $2.5=$2.5.

Product & allocative efficiency

Next we shall see if McDonald is productively efficient in the long run. looking at the graph we can that McDonald is not producing burgers at a minimum ATC, how do we know this that is because MC=ATC at its lowest point.. in other words the Qpe is the productively efficient quantity that McDonald should be aiming for. Due to Mcdonald price making power they will restrict their output and charge the customers slightly higher prices than the minimum ATC therefore not utilizing its resources in the least cost manner (Sloman.J,Wride.A,Garratt.D 2012).

Now we examine whether McDonald is allocatively efficient to do this we must study its demand which is a symbol of marginal benefit. If marginal Benefit equals marginal cost at Mcdonalds profit maximizing level of output MC=MR then we can say that they are allocatively efficient. but looking closely at the diagram we can notice that the margnal benefit to society is greater than the marginal cost to McDonald this means that McDonald is limiting its output of burgers. It is producing burgers less than the  socially optimum amount in order to maximize their profits, in this case to break even.

In the end McDonald will have neither allocative or productive efficiency simply because it has a downward sloping demand curve and a marginal revenue that lies under demand, plus McDonald charges $0.5 which is higher than its minimum ATC. another reason is because its selling its burgers higher than its marginal cost meaning that the resources used to produce burgers are under allocated towards McDonald output in the long run even though they are not earning economic profits.

References

bugerlad (2013) Burger King Menu Items and Prices in the UK (blog).17 january. Available from http://www.burgerlad.com/2013/01/burger-king-menu-items-and-prices-in-uk.html [ Accessed 08 June 2013].

Long,N. (2013) Chron. Available from http://smallbusiness.chron.com/calculate-marginal-revenue-3480.html [Accessed 08 June 2013].

Mankiw,N.G (2004) Principles of Economics. 3rd ed. Thomson South Western.

McDonalds (2013) McDonalds. Available from http://www.mcdonalds.com/us/en/our_story.html [Accessed 08 June 2013].

Sloman,J., Wride,A.. Garratt,Dean. (2012) Economics. 8th ed. Pearson