Discuss the elasticity of Burger King Corporation

Question

Discuss the elasticity of Burger King Corporation, in microeconomics way.

Answer

Elasticity determines how changes in product demand and supply relate to changes in price or income (Sloman et al. 2012). Predominantly, it is used to measure change in consumer demand as a result of a change in product price (PED). PED = (% change in quantity demanded )/(% change in price)

Inelastic demand = <1  (change in price does not affect demand)
Elastic demand = >1  (change in price results in changes in demand)

Understanding whether or not a business’ product is elastic or not is integral to the success of a company. Several studies, such as Andreyeva et al. (2010) found that fast foods like Burger King were among the most responsive of food categories to price changes. Factors affecting Burger King Corporation’s PED:

Availability of substitutes - The more possible substitutes, the greater the elasticity. The fast food market is saturated with firms of different sizes. BK must also consider the variety of firms in terms of types of products. 

The degree of necessity – There are health concerns with fast foods and they are not deemed as necessary. 

Cost of switching products – This is low and corresponds to ease of transferring from BK to other companies.

Cross elasticity – Suppose that cross elasticity of demand between BK and McDonald’s is positive and large. Market-oriented pricing strategy is prevalent in the industry and if BK choose to raise their prices, customers will switch to McDonald’s. 

However, some individuals may have brand loyalty to BK. Furthermore, to some extent BK is subject to habitual consumption because it has become the default choice; this is particularly true for busy working people needing a quick service. BK has to compete using bundle pricing strategy and price wars, such as the McDonald’s McRib sandwich vs $1 BK BBQ Rib (cheaper alternative), implying high elasticity.

References

Sloman, J., Wride, A., and Garratt, D. (2012) Economics, 8th edition, London: Pearson Education Ltd. Andreyeva, T., Long, M.W., and Brownell K.D. (2010) The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food. Am J Public Health, 100(2), 216-222.