Fast Food Services in Australia - Case Study Example

Life Project Analysis of Fast Food Services in Australia Name Date Course 1. Overview and Market structure I. Overview The fast food industry mainly serves the customers with high energy nutritious and health foods. The main products of the industry include chips, burger, grilled chicken, fried chicken, sandwich, yoghurt, sausages desserts and confectionaries (Magner, 2015). II. Market structure In the fast food industry, there are many competitors that sell the products found in the industry. As a result of high number of competitors in the market, the competition is quite intense. The products of the competitors in the market are differentiated by quality and barding. This therefore indicates that the market structure is monopolistic. In a monopolistic market structure, the prices of the products of the company are influenced by the intensity of the competition (Taussig, 2013). In the fast food industry, the prices are usually dependent on the prices that are offered by the competitors. This has made the prices of the products almost similar. There are only a few barriers to the market entry and hence the high number of businesses operating in the industry. The number of producers and consumers is unlimited. A market that has unlimited number of producers and consumers is referred to as a perfect market. However, a perfect market only exists theoretically. The market structure in the fast food industry therefore displays monopolistic as well as perfect market structures. The number of restaurants has been increasing over the years and so is the number of consumers. 2. Demand and supply analysis III. Demand theory One of the conditions that are a determinant of demand in the industry is the need to satisfy the taste of the customers. According to the theory of demand, people demand goods and services for the purposes of satisfying a want (Sloman, Norris & Garrett, 2013). The need to satisfy certain cravings is a major driver of demand among the younger customers. The growth in the disposable income is also one of the major drivers of demand in the market. There has been an increase in the amount of disposable income in most households which makes it possible for the people to buy luxurious products. According to the demand theory, the ability of the customers to procure the goods is an important driving force for the demand. Most of the customers in the industry are the working class. This includes the parents who provide their children the money to purchase the products of the industry. The willingness of the customers is also a determinant of demand in the industry. The industry has increasingly been focusing on the production of healthy food. This has increased the willingness of the customers to consume the products of the industry. Willingness by the customers to purchase the products is an important aspect in the demand theory. IV. Supply theory According to the theory of supply, the cost of production is one of the determinants of supply. The supply is high when the cost of production is low. However, the supply is low when the cost of production is high. In the industry, the cost of production is relatively low. The main costs in the industry mainly involve labour. The other expenses are relatively low and this favours the supply of the products in the market. According to the supply theory, technology is one of the factors that determine the supply of products. In the fast food industry, the frequent changes in the industry does not increases costs in the industry. The fast food chain like KFC utilizes the modern technology for the purposes of increasing its levels of production. This has played an important role in terms of increasing the levels of supply. According to the theory of supply the indirect taxation plays an important role in terms of determining the level s of supply (Rios, McConnell & Brue, 2013). In the fast food industry, the levels of taxation are quite low and this has contributed to an increase in the levels of supply. 3. Market analysis V. Market for traditional fast food A. Market for traditional fast food Market equilibrium Initially, the demand for the traditional fast food was very high. This was attributed to the lack of social awareness of the health problems associated with the traditional fast food. The high levels of demand for the traditional fast food resulted to the high levels of supply. An increase in demand usually leads to an increase in supply for the purposes of meeting the needs of the consumers (Marshall, 2009). An increase in demand usually shifts the demand curve to the right. This has the potential of leading to an increase in the process of the product. The shift of the demand curve to the right only creates a temporary shortage in the market. The supply has to increase in order to meet the demand in the market. An increase in the supply creates a surplus in the market (Marshall, 2009). This leads to the reduction in the prices. The situation was the same for the traditional fast food as the surplus was created by an increase in the number fast food chain leading to the increase in the supply. However, with the increasing social awareness, the demand for traditional fast food started reducing. The reduction in demand and supply led to the development of the equilibrium price. The point in which the supply and demand curves intersect is referred to as an equilibrium price. At the point equilibrium price, the prices for the fast food are steady. The price of the traditional fast food has thus remained constant over a period of time as a result of changes in the supply and demand. B. Overall changes to demand A decrease in demand The demand for the traditional fast food has been changing over the years as a result of social awareness which has led to a reduction in its consumption. A new equilibrium price is developed when the demand is changes (Cowen & Tabarrok, 2009). A change in demand also leads to the changes in supply of the product. In the fast food industry, the number of restaurants and fast food chains that produces the traditional fast food has reduced drastically. The traditional fast food occupies only 5.6% of the market share. This is as a result of the changes in the demand. Most of the people are concerned about their health and do not consume the traditional fast food. As a result of the changes in the demand, there have also been changes to the prices of the traditional fast food. The prices are currently lower as compared to the past. The reduction in the process can be attributed to the low number of customers despite their purchasing powers. A decrease in demand results to a decrease in supply and a drop in the prices. VI. Elasticity A. Own price elasticity According to the elasticity of demand, a change in own price leads to a change in the quantity demanded (Taussig, 2013). In the fast food industry a temporary change in the traditional fast food led to a decrease in the quantity demanded. According to income elasticity, the responsiveness of the quantity demanded for a commodity changes with income. An increase in the income leads to an increase in the demand of the traditional fast food. B. Probable price sensitivity The prices of the traditional fast food are sensitive to the income as well as the demand. Since it is considered as a luxurious food product, it is mainly purchased when people have a high income. The price of the traditional fast food therefore increases depending on the income. C. Price increase A rise in the price of the traditional fast food will have a positive impact on the healthier food alternatives. The number of customers purchasing the healthier food alternative will increase while the number of customers purchasing the traditional fast food will decrease. This is because most of the customers are aware of the heath dangers associated with the traditional fast food and can therefore change their preferences in case of price changes (Magner, 2015). VII. Government intervention A. Existing level of government intervention The government intervention in the industry is for the purposes of supporting its growth and development. In the fast food industry, the government intervenes by paying subsidies. The payment of subsidies is important in enhancing the growth and development of the industry through reduction of costs (Sloman, Norris & Garrett, 2013). The government has also intervened in the industry through the reduction of taxes. The businesses operating in the industry are only required to pay a low amount of taxes. This has impacted positively on the growth and development of the industry. B. Impacts of the government intervention The government intervention in the fast food industry has a positive impact on the industry as well as the consumers. The profitability in the industry has been increased as a result of the low taxes. The operation al costs have also reduced as a result of the government subsidies. This has led to the growth and development of the industry as it has become profitable. The government intervention has also seen the customers benefiting from the low prices of the products in the industry. The low cost of the products has impacted positively on the affordability of products in the industry. 4. Further Analysis of the market VIII. Externality in the traditional fast food Externalities are considered as one of the main cause of market failure. The externality is considered as a spillover effect and it may either be positive or negative. Externalities can also be defined as cost or benefit that affects someone who is not directly involved in the production or consumption of goods and services (Cowen & Tabarrok, 2009). In the fast food industry, the externality is positive. A positive externality occurs when the members of the public or customers obtain more information about the products of the company. The information may influence the decision making process of the third party or the customers. This may result in the decrease in demand for the products of a particular industry (Taussig, 2013). The traditional fast food industry is faced with positive externality. This is as a result of education which has enlightened the people about the health risks that are caused by the traditional fast food. In the fast food industry, the positive externalities are beneficial to the customers. However, it is unpriced and it does not reflect on the market price that is provided to the customers. This means that the social benefits are far much greater than the private benefits. The health benefits for the consumers are greater than the benefits that the businesses are able to achieve. The positive externalities usually lead to the demand curve shifting to the right in order to reflect the social benefits. The market usually produces the quantities that are for the private benefits and hence contributing to the underproduction in the market. The diagram below shows the effects of positive externalities in the fast food industry. The market equilibrium shifted as a result of market externality and hence affecting the prices as well as the demand of the traditional fast food. Unregulated market As a result of the positive externalities, the prices and quantity only reflects the private costs and benefits. The unregulated market would result to P/Q. In unregulated market, there is no production of efficient equilibrium (Marshall, 2009). This results to market failure. Underproduction of products in the products in the fast food industry is as a result of the unregulated market and this has contributed to the current position of the traditional fast food industry. The market equilibrium output in the in the traditional fast food industry is less than the socially optimal output as a result of the positive externalities. The economic welfare is usually reduced when the market produces too little of the product. Government intervention is therefore required in order reduce the impacts of the externality. The government subsidy can be used for the purposes of dealing with the externality. The subsidy will encourage output to the efficient equilibrium. The intervention will also result to socially desirable production. The diagram below shows how the government intervention through the use of subsidies can lead to the production of efficient equilibrium which may stabilize the prices. Government intervention List of References Magner, L, 2015, IBIS World Industry Report H4512 Fast Food Services In Australia, IBIS World. Taussig, F, W, 2013, Principles of economics (Vol. 2), Cosimo, Inc.. Sloman, J, Norris, K, & Garrett, D, 2013, Principles of economics, Pearson Higher Education AU. Rios, M, C, McConnell, C. R, & Brue, S, L, 2013, Economics: Principles, problems, and policies, McGraw-Hill. Marshall, A, 2009, Principles of economics: unabridged eighth edition, Cosimo, Inc.. Cowen, T, & Tabarrok, A, 2009, Modern principles of economics, Macmillan. Read More