Question

(Related to the Chapter Opener on page 414) By 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens that had been fed antibiotics. The change increased McDonald's costs, but an article in the Wall Street Journal noted that "McDonald's ability to raise its prices is limited because of stiff competition." Does this "stiff competition" mean that the demand curve for McDonald's Chicken McNuggets is horizontal? Briefly explain.

Short answer

No, stiff competition does not mean that the demand curve for McDonald's Chicken McNuggets is horizontal. While their demand is elastic due to many available substitutes, it is not perfectly elastic. Some consumers might continue to buy McNuggets despite a price increase due to unique taste preferences, meaning that the demand isn't infinite at any price less and zero at any price more, like it would in the case of a horizontal demand curve.

Step-by-step solution

Understanding the concept of demand curve

In economics, the demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a period of time. A perfectly elastic (horizontal) demand curve means consumers will buy unlimited quantity at a certain price, but nothing at all above that price. An elastic, but not perfectly elastic (downward sloping but flat) demand curve on the other hand means consumers will reduce their quantity demanded greatly if the price increases, but won't stop buying completely.

Analyzing McDonald's situation

McDonald's operates in a market with stiff competition, which means consumers have a lot of substitutes for McDonald's Chicken McNuggets. This makes the demand for McNuggets elastic, as any significant increase in price may cause consumers to switch to other alternatives.

Concluding whether McDonald's demand is horizontal or not

Even though McDonald's faces stiff competition and has an elastic demand, it does not mean that McDonald's demand curve for Chicken McNuggets is horizontal, implying perfect elasticity. Although many substitutes for McNuggets exist, consumer preference for McDonald's unique taste may still exist. Thus, some consumers might still buy McNuggets even if the price increases, indicating that the demand is not perfectly elastic.

Key concepts

Elasticity of Demand

In the world of economics, understanding the elasticity of demand is crucial. It describes how the quantity demanded of a good or service changes in response to a change in its price. The more elastic the demand, the more sensitive consumers are to price changes. In practical terms, if a product has elastic demand, a slight increase in price will lead to a significant drop in the amount that consumers are willing to purchase.

For example, consider the case of fast-food chicken nuggets. If the price goes up and consumers can easily choose a different type of fast-food item, then chicken nuggets have an elastic demand. By contrast, if the price of a life-saving medication that has no substitutes increases, the demand would likely be inelastic, since patients still need it regardless of cost.

When analyzing problems of elasticity, economists use a numerical representation called the price elasticity of demand coefficient, calculated by dividing the percentage change in quantity demanded by the percentage change in price. If this coefficient is greater than 1, the demand is considered elastic; if it is less than 1, it is considered inelastic.

Perfect Elasticity

An intriguing and theoretical extreme on the spectrum of elasticity is perfect elasticity. When we say that a demand curve is perfectly elastic, we're imagining a situation in a market where the demand curve is a horizontal line. This implies that consumers are only willing to purchase a good at one specific price, and not a penny more. If the price rises even slightly, the quantity demanded immediately drops to zero.

However, perfect elasticity is more of a theoretical construct than a common real-world scenario. In the case presented in the textbook, despite McDonald's facing intense competition, the demand curve for their Chicken McNuggets isn't perfectly elastic because consumers exhibit a preference for the brand's taste and might tolerate slight price increases.

To illustrate perfect elasticity further, think of a farmer's market where multiple vendors sell identical peaches. If one vendor tries to increase the price, while the others do not, customers will quickly shift to the cheaper options, and the vendor's sales would plummet. This market has characteristics close to perfect elasticity.

Market Competition

Market competition is a force that significantly impacts the elasticity of demand. It refers to the competitive environment in which businesses operate, trying to attract customers by offering better, cheaper, or unique products or services compared to their rivals. High levels of competition can give consumers more choices, thereby making the demand for each individual vendor's product more elastic.

In markets with stiff competition, such as the fast-food industry referenced in the McDonald's Chicken McNuggets scenario, consumers have numerous alternatives. This abundance of choices means that if McDonald's raises its prices, consumers can easily switch to a competitor's product. Yet, competition doesn't uniformly make demand perfectly elastic. Factors such as brand loyalty, product differentiation, and consumer preferences play crucial roles.

It is not merely the existence of competition but the relative strengths and weaknesses of the competitors, along with consumer behavior patterns, that ultimately shape the dynamics of market competition and demand elasticity.