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Economic Theory

KFC management decides not only what to produce and how to
produce it but also how much to charge for each item. Before you took
your economics course, you probably gave very little thought to where
those prices on the menu came from.

You look at the price again: €5 for an order of fried chicken. Just as
you were able to learn some things about the customer from observing her

decision, you realize that you can also learn something about KFC. You
know that KFC would not sell an order of fried chicken at that price unless
it was able to make a profit by doing so. For example, if a piece of raw
chicken cost €6, then KFC would obviously make a loss. So the price

charged must be greater than the cost of producing the fried chicken. KFC
cannot set the price too low, or it would lose money. It also cannot set the
price too high. What would happen if KFC tried to charge, say, €100 for

an order of chicken?
Common sense tells you that no one would buy it at that price. Now
you understand that the challenge of pricing is to find a balance: KFC
needs to set the price high enough to earn a good profit on each order sold

but not so high, that it drives away too many customers. In general, there is
a trade-off: as the price increases, each piece sold brings in more revenue,
but fewer pieces are sold. Managers need to understand this trade-off

between price and quantity, which economists call demand. It depends on
many things, most of which are beyond the manager’s control. These
include the income of potential customers, the prices charged in alternative
restaurants nearby, the number of people who think that going to KFC is a

cool thing to do, and so on.

Case Study 2

Macroeconomics in a Fast-Food Restaurant

The economic decisions you witness inside Kentucky Fried Chicken
(KFC) are only a few examples of the vast number of economic
transactions that take place daily across the globe. People buy and sell
goods and services. Firms hire and lay off workers. Governments collect

taxes and spend the revenues that they receive. Banks accept deposits and
make loans.

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