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Product, Services, and Prices in the Free Market Economy
The price changes of goods in the marketplace impact the supply needed and profits earned of companies. Companies that understand the concepts of price elasticity, including the concepts of the theory of demand and supply are more likely to determine the equilibrium price that maximizes supply and demand and devise pricing strategies accordingly to maximize profits. Marketline (n.d.) states McDonalds Corporation, formed in 1955, is a fast food chain offering a variety of foods including the Big Mac, which was introduced in 1968 and became one of the most popular foods in the world. As profits have diminished over time, McDonald’s tried implementing a strategy based on their hope that the demand for Big Macs was elastic. In 1997, McDonald's, “…under the leadership of chairman and chief executive Michael Quinlan, is opting for a time-tested tactic: cut your price, tempt more customers into the store and let your rivals sweat” (South China Morning Post, 1997). Economists measure the changes in price of goods and the demand for the products so that they can understand the market for the goods and the consumer reaction to price changes. Additionally as consumer’s income changes, this affects their decision on buying certain goods and not others.
In order to maximize profits, which McDonalds has learned to do since it had revenue of $22,786.6 billion in 1997 according to Marketline (n.d.) it has to understand where to set prices on its products. Additionally, McDonalds needs to understand the effect or change in consumer purchasing as prices for products are increased or de ...