Fast -Food Industry
Cost analysis in the Fast -Food Industry using case on p. 115. Oligopoly Behavior in the Airline Industry using case on p. 231. Critiquing the Federal Reserve using the case on 361. Some aspect of international economics.
- Cost Analysis in the Fast Food Industry
Costing is an important component of the fast-food industry. The economics of the fast-food industry is somewhat complicated due to the small cost items. Some common costing methods include activity-based costing, variable costing, and absorption costing methods (Jiaxin, 2017). The costing method adopted by a fast-food company is vital as it determines the input costs, profit, and productivity of its products. With high growth in the middle-income groups and global population, the fast-food industry has become one of the key providers of essential goods and services. Due to its nature and fast movement of goods, it is important to adopt a proper cost analysis for better cost controls and maximize an organization’s profits (Jiaxin, 2017. Expenses incurred in the fast-food industry are either fixed or variable. The fixed costs include management salaries, interior decors, laundry expenses, insurance, and depreciation of fixed assets. On the other hand, variable costs in this sector include attendant salaries, supplies, lighting, water, and power. The cost of meals is either directly or indirectly charged to the customer, depending on the model adopted by a given eatery.
The continuous development and growth of the global economy have increased the growth of fast-food businesses. Some of the global brands, such as KFC and McDonald’s, have opened branches across the world through franchising. However, despite their tremendous growth, many fast-food businesses do not pay attention to cost controls, regardless of the fierce competition. Cost analysis and control are important in reducing management and operational costs, while improving the efficiency and effectiveness of the business. The optimal goal of any business is to maximize profits for its shareholders. Cost control for the fast-food business is specifically aimed at guaranteeing quality services, improving production management, reducing enterprise costs, and realizing maximum benefits. Despite the aims of reducing costs in the fast-food industry, it is important to maintain a high degree of quality services for customer retention and loyalty. The fast-food sector is also under pressure to attract customers and improve its economic benefits (Jiaxin, 2017). Hence, cost analysis in the industry is important for both survival and development.
Cost analysis in the fast-food industry is related to its demand and supply factors. For example, during the summer holidays, there is higher revenue generation than in the winter seasons. Cost analysis during this period often reveal higher input costs in terms of supplies and labor. The industry, therefore, adopts a more lenient costing strategy to boost its revenue-generating power. On the supply side, an increase in the cost of inputs, especially the cost of supplies, results in a more stringent costing model to ensure that the organization maintains an optimal profit. The role of cost analysis in the fast-food industry is thus to provide a clear financial management plan to account for costs and maximize profits. As a result of high competition, proper cost analysis and costing models can maintain quality services to customers and ensure that the business meets its profit targets. Furthermore, cost analysis in the modern business environment is much related to technology application. Hence, a business can choose the right technology in pricing for its products, which maintains a competitive advantage in the highly dynamic market. According to Jiaxin (2017), the costing method adopted by a given hotel should be flexible in responding to market demands, seasons, and cost of inputs. Overall, cost analysis is key for sustainable competitiveness and growth in the fast-food industry as it enables firms to strategically respond to supply and demand factors.
- Oligopoly Behavior in the Airline Industry
The airline industry is considered an oligopolistic market in that market reaction from competitors follows an increase in prices set by one airline. A reduction in prices would, however, result in lower prices by other airline firms (Caspar & Robert, 2014). For example, the U.S. airline industry is considered an oligopoly controlled by four main carriers: American Airlines, Southwest Airlines, United Airlines, and Delta Airlines. In an oligopolistic market, the market is controlled by a small group of market players due to entry barriers, which discourages new entrants from investing in the industry. Since the deregulation of the airline industry in 1978, the market has become an oligopoly controlled by the four firms. According to the latest statistics, American Airlines has the largest market share of approximately 17.6%, followed closely by Delta Airlines at 17.5%. Southwest Airlines and United Airlines, on the other hand, control 16.9% and 14.9% of the total market share, respectively (Scott & Carolyn, 2018). The rest 33.1% is controlled by smaller airlines in the industry. Apart from the U.S. case study, major airlines globally have been able to control and influence prices by maintaining high entry barriers due to their large economies of scale and first-mover advantages.
The airline industry is considered an oligopoly due to several factors. Although competition is vital in developing a market segment by lowering prices, it does not always guarantee stability of the market. The airline industry is associated with high levels of investment, meaning high fixed costs, which do not vary with the level of output—some of the common fixed costs in this sector, include maintenance costs of fleets. Variable costs in this sector vary with the level of output, which mainly constitutes fuels and salaries. Variable costs in the airline industry tend to be relatively low but can sometimes be highly volatile, especially fuel prices. In management accounting, firms with relatively high fixed costs and low variable costs tend to distribute their fixed costs to their output level, which in this case includes the airline tickets.
The economic incentives are a major driver of growth and development of airline firms to enjoy the economies of scale. Following the airline sector deregulation in the U.S., competition reduced air tickets to the point that some firms could only cover their variable costs. The failure to cover fixed costs led to many cases of bankruptcy and mergers for most airline firms. In the last two decades, the world has seen several mergers and joint ventures in the airline sector as firms move to control costs in their portfolios (James & Anming, 2013). The process has reduced the competition level, leaving the American market with only four firms that influence market prices. The firms have considerable market power, and due to huge investments and start-up costs, the barriers to entry are higher (Caspar & Robert, 2014). The major airlines, therefore, enjoy economies of scale as they can offers and maintain their services at lower average costs.
- Critiquing of the Federal Reserve
Since its inception in 1913, the U.S. Federal Reserve has been criticized on several occasions. The first criticism of the Federal Reserve was in 1929 by economist Milton Friedman who criticized the wall street crash that led to the great depression. Milton and Anna argued that the erroneous monetary policies were a lead case of the Great Depression (Stephen, 2017). Following the stock market crash in 1929, the Federal Reserve continued with restrictive measures of money supply and refused to bail out the suffering banks. During this error, economists argued that the restrictive measures were a contributor to the mild recession, which was later catastrophic, causing a global economic meltdown (Stephen, 2017).
On the monetarist view, the Great Depression was highly caused by a limited money supply. Hence, economists questioned the purpose and role of the Federal Reserve if it could not hold proper monetary policies to prevent such economic meltdowns. With the economy’s contraction, there was a significant drop in income, price of products, and rates of employment. The money supply restriction forced people to hold more money than the supply from the Federal Reserve. Hoarding money meant reduced consumption and demand for products and services, which caused a contraction in employment and full productivity in the manufacturing sector (Stephen, 2017). Hence, Milton and Schwartz argued that the Federal Reserve’s monetary policies were not adequate, and that they restricted the growth of key sectors. The notion has been supported that the poor leadership of the Federal Reserve led to an economic meltdown.
The Federal Reserve was also criticized as a partial contributor to the global financial crisis experienced between 2007 and 2008. Economists, such as John Taylor, have asserted that the Federal Reserve was a partial contributor to the housing bubble that led to the global financial crisis. Notably, the Fed kept the interest rates low following the 9/11 terrorist attack to allow for economic recovery. The housing bubble was a result of a credit crunch. Although the Fed is responsible for controlling the long-term interest rates, it did not raise the short-term interest rates, leading to a credit concentration as people could afford loans in the short-term but could not afford to pay in the long-run (Stephen, 2017).
Further, the Fed’s role as a supervisor and regulator has been criticized by the U.S. legislators as ineffective. The failure to protect consumers through the banks’ over lending policies and sub-prime lending was an abysmal failure that led to the financial crisis. The Fed had a role in protecting borrowers, and providing proper oversight in the banking sector, which could have had streamlined lending and helped avoid the global financial crisis. Other critics of the Federal reserve include the lack of transparency in some of its committees, which are not sufficiently audited (Reuters, 2018). For example, the Federal Open Market Committee, which forms part of the Fed, has been criticized for the lack of transparency.
The majority of Americans view that the system should be held accountable for its actions or be abolished. In the eyes of the public, reports from the committee are seen as biased and favoring the rich and wealthy in society hence the abolishment. In addition, legislators, including Republicans, have accused the Fed of hurting the economy on the dollar’s devaluation. They argue that the fiscal and monetary policies advocated by the Fed often lead to economic booms and busts when the latter creates too much or too little fiat currency (Reuters, 2018). However, the Fed’s supporters support its independence as their policies are effective in maintaining low inflationary conditions and protecting the economy from undue disadvantages in the international markets.
- International Economics
International economics is a field of study in economics that focuses on assessing the implications of international trade and investments. International economics is mainly comprised of international trade and international finance (Giancarlo, 2004). International trade includes the microeconomic models that analyze the demand and supply factors in the global economy. The main underlying principle of international economics is the theory of comparative advantage (Giancarlo, 2004). Through this principle, countries focus on producing goods at the lowest cost and export to countries that produce goods at a relatively higher cost. Therefore, there is a maximization of resources in international economics, enabling countries to exchange goods and services with each other. Common forms of international trade include export, imports, and entrepots. People exchange goods and services between one country and another through international trade. The main basis for international trade is to maximize its economies of scale by diversifying its resources to different countries (Steven, 2010). On the other hand, international finance dwells on macroeconomic models in understanding the global economy. The model focuses on the interrelationships between aggregate economic variables such as inflation rates, unemployment rates, interest rates, gross domestic product, and exchange rates. The area of study analyzes the determinants of foreign direct investments and exchange rates and the effects of governments’ monetary and fiscal policies. Globalization has contributed immensely to the growth of international finance. Some areas of interest on international finance include the Mundell Fleming model on the interaction of goods and money markets, the international fisher effect, the optimum currency theory, the purchasing power parity, the interest rate parity, and the hedging techniques in the international markets (Giancarlo, 2004). Overall, international economics focuses on studying economic interactions between countries globally.
The scope of international economics is important in understanding the global trade, foreign investments, and exchange of currencies. Countries also understand how they can solve their international issues in international economics. The field is becoming an important area of study due to the integration of the global markets (Steven, 2010). Consumers, businesses, and governments are affected by internal shocks, but they must be aware of what is happening on a global scale. A good example is the Covid-19 pandemic that forms the larger part of international economics. The pandemic has caused a decline in purchasing power, causing a decline in imports and exports among nations. The volumes of international trade have plummeted due to decreased demand in such key sectors as tourism, hospitality, airline, and sports. Besides, due to unpredictable business environments, the rates of foreign direct investments remain low during the pandemic period. Furthermore, the financial markets that comprise the money and capital markets have been highly affected. Since, businesses cannot access the necessary funding to finance their operations, understanding the concepts of international economics can enable business leaders, policymakers, and governments to make informed decisions on how to stabilize their economies (Steven, 2010). Businesses can also acquire low-cost financing in the international financial markets by understanding the models of international economics.
Caspar, S., & Robert, U. (2014). Dynamic Oligopoly Pricing: Evidence from the Airline Industry. Working Paper: Toulouse School of Economics, 1-46.
Giancarlo, G. (2004). Elements of International Economics. New York : Springer Science and Business Media .
James, B., & Anming, Z. (2013). Dynamic Oligopoly Behavior in the Airline Industry . International Journal of Industrial Organization , 407-435.
Jiaxin, S. (2017). Analysis of Cost Control in Hotel Financial Management . International Conference on Social Science, Management and Economics , 1-6 .
Reuters. (2018). Trump widens critique of Federal Reserve, calls it his ‘biggest threat’. Retrieved from The Globe and Mail : https://www.theglobeandmail.com/business/article-trump-criticizes-federal-reserve-says-central-bank-is-his-biggest/
Scott, W., & Carolyn, B. (2018). The Economics of Flying: How Competitive are the Friendly Skies? Retrieved from Economic Research: Federal Reserve Bank of St Louis: https://research.stlouisfed.org/publications/page1-econ/2018/11/01/the-economics-of-flying-how-competitive-are-the-friendly-skies/
Stephen, Z. (2017). Is the Federal Reserve System a Governmental or a Privately controlled organization? Retrieved from American Monetary Institute: https://www.monetary.org/35-key-articles/97-is-the-federal-reserve-system-a-governmental-or-a-privately-controlled-organization
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