McDonald's Senior Coffee (I'm a newbie)

Economics Economics Questions
21

You’re right that I should try to avoid bringing up normative economics or politics, a mistake I’ve made in the past.

I thought it was downright laughable, though, that someone suggested large corporations engage in charity because it’s profitable. Because if charity was profitable, why then would there have ever been any poverty, historically? It’s such a preposterous non-economic claim which goes against the basics of supply & demand.

I didn’t inject ideology into the discussion, but responded to a statement which seemed to reek of “Vulgar Libertarianism.” It seemed to reflect a belief that corporations are somehow free-market entities, and I thought I should say something. I can’t see how you can disagree with me.

You ought to know that it is impossible for me to fully drop any preconceptions of what Austrian economics is and, being human, it is of course possible that I may be wrong in certain assumptions about what Austrians believe, just as you may be wrong in misunderstanding what I say that Austrians believe.

22

The payoff is not “expected”. The payoff is immediate. In a business liquidation, some money is better than no money. It’s more profitable to sell day old bread for a discount than to dump it in the garbage. This is a very common exchange. Decisions, choices, are economic action, not “notional accounting”. You’re just failing to see that throwing away day old bread for no money is less profitable than selling day old bread for a discount. Discounting is profitable action; if discounting wasn’t profitable action discounting wouldn’t occur. You’re better off, profiting, from all exchanges, no matter what the “notional accounting” is.

And this may also be the possible reason for McDonald’s selling the Senior discount coffee. Working people are on the go early. Seniors may be more liesurely and purchasing the senior discount coffee after the morning rush. McDonald’s may be just getting rid of the bottom of the barrel of the brewed coffee with the senior discount.

23

It promotes the firm’s image within the market (i.e. the belief that the firm is giving something ‘back’.)

They aren’t, so you’re correct on that. However, the claim was conjecture as to why the firm may choose to do this, not praise for McDonalds.

24

You commit the fallacy of comparing ALL the diamonds to ALL the water. Just as a diamondmay be more valuable than a glass of water so too may a charitable donation be more valuable than some other use of what is given. Charity is by definition voluntary action. That means all acts of charity contain the FULL SET choice possibility of making a charitable donation or NOT making a charitable donation. The act of making a charitable donation will only occur when the individual subjective valuation of making a charitable donation is GREATER than the individual subjective valuation of not making a charitable donation. Charitable donations can indeed be bundled with fame and image. Bill Gates can choose to make anonymous donations. Bill Gates can choose to create a high profile charitable foundation. But because charity is a choice, because charity is a voluntary exchange, because charity is ACTION, charity is only occurring when that which is receieved is valued more than that which is given away in exchange. Charity and voluntary sacrifice is explained by economics. It’s simple subjective preference.

Chairty is profitable. Every person who receives and every person who gives charity increase both their subjective wealth from that exchange. It doesn’t matter if it’s an individual person or a corporation like McDonald’s. It’s the action which is analyzed. If charity wasn’t increasing wealth, generating economic profit at the moment of exchange, it wouldn’t be occurring.

25

Agreed. Nathyn, you need to re-evaluate your understanding of the word “profitable.” It is more than just dollars and sense, it is subjective, like rtr says. Giving to charity, and a charity receiving money from the giver, is a voluntary action. Therefore, it makes both parties better off in their subjective sense. If it didn’t, the exchange would never occur.

26

I don’t see how this is an instance of product differentiation. It is a perfect example of price discrimination, no? Similar to how an Airline will use price discrimination when they sell tickets at a lower price to people buying farther in advance of the flight date, McDonald’s is using price discrimination by selling coffee at a lower price to someone who has a lower “willingness” to pay.

How is it product differentiation is the cup of coffee senior citizens buy is the same exact product as the cup of coffee everyone else buys?

27

obviously, rtr, you don’t work in retailing, like yours’ truly, so i’ll try to take it slowly for you, and i’ll even address your “new” example of old bread sold at a discount. now, that baked bread is a sunk cost, ie quantifiable money costs have been incurred. your costing dept will tell you how much gas, flour, water, labour, yeast etc has cost in cold, hard cents. as a retailer, you are hoping to maximize revenues by selling said loaf as fresh bread. as you say, if the loaf doesn’t sell, then obviously discounting is still a way of recouping some of the sunk cost. the mcdonald’s coffee is not a sunk cost. that coffee not sold to a senior at a discount is sold to a full price customer. so the analogy with the baked loaf is misleading. as for mcdonalds deliberately selling the dregs to seniors, ask yourself how practical it would be, and where would the goodwill be? seniors have tastebuds, too! the decision to cop a monetary loss is management’s, and is informed by unquantifiable, non-monetary factors. do you understand the importance of accounting is business? it would seem not.

28

Wgeary, yes, I already took notice of that. Read the article I provided regarding airlines.

29

nathan writes:

“Price is only tied to cost for purely competitive firms.”

noone suggests that cost and price are mechanically linked. price is whatever you can get from the customers, and is always an educated guess. cost, on the other hand, is perfectly able to be calculated, and will inform the pricing decision. the corporate graveyard is full of example of companies who had plenty of revenue, but couldn’t accurately cost their operations. as an aside, the margins of retailers like mcdonald’s and especially walmart are very thin, they are volume models. i suspect you’re right to doubt the altruistic nature of the discounts, but perhaps it’s to deflect criticism from people like you with an axe to grind.

30

Bread isn’t baked unless at the moment of baking the baker increases his subjective value profit. The baker at every moment has the choice to NOT bake bread.

And by definition, the act of baking bread shows that at the moment of baking bread the baker is profiting more than “the cost of gas, flour, labour, yeast, etc.”. If the baker at the moment of baking was NOT profiting more than “the cost of gas, flour, labour, yeast, etc.”, he would NOT bake the bread.

This is a NEW EVENT. This may represent a change in subjective valuation of the baker’s potential customer. If so, this signals the baker, and the baker too changes his subjective valuation of the bread as well. Remember, all action is occurring in the present tense.

Discounting is a NEW event. You can certainly “notionally account”. But the act of discounting only occurs because it is subjectively MORE valuable than the act of NOT discounting. This is in strict economic epistemological analysis terms PROFIT derived from action. By ignoring the action part of discounting, “notional accounting” misses the fact that profitable trade action continues to occur in spite of changing subjective valuation. All action whatsoever is a “sunk cost” in the past tense. And “notional accounting” is ARBITRARY, both in what is included and excluded from its guestimate measurement, and in the time period of comparison it covers between events. Example: You buy a house for $300K. You sell that house for $500k. That house is subsequently worth $1M. So did you profit $200K, or did you lose $300k? Both conclusions could be correct under a “notional accounting ‘standard’”. You have events A, B, and C. From A to B you profit $200K. From B to C you “lose” $500K. From A to C you “lose” $300K. Nobody is omniscient of future changing subjective valuations. But everyone weighs the relative subjective value of things receieved and given away at every moment of trade (and at every moment of individual action).

We don’t know that yet. Is McDonald’s brewing coffee in a big barrell or is McDonald’s brewing coffee in a home-size small coffee jar? And what about individual cups of coffee being drunk by individual coffee drinkers? Does their profitable trade for coffee turn into a loss if they accidentally spill it? If they get distracted at work and leave it sitting on their desk only half drank? If they spill the the last un-drunk 10% of the cup into the sink?

It might be that the difference in quality between the 100% full to 15% full is not that great a difference between the 15% full to 5% full barrell. And the day to day demand variance warrants a senior discount to clear the inventory. If they use up the barrell they can brew extra coffee in a home-size small coffee jar.

Of course notional accounting in business is important. But that doesn’t change the irrefutable fact that discounting only occurs because it is more profitable to discount than to not discount whenever discounting is occurring.

31
32

in reply to rtr:

“accounting loss” is not, as you put it: “purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade.” this is where you going wrong. accounting profit is revenue loss cost. end of story. even successful businesses make accounting losses on various transactions, sometimes intentionally (in the case of loss leaders to attract clientelle), in other cases unintentionally when products and services don’t sell at what was hoped for. successful business is not about avoiding a loss on every sale, but rather about making sure that over time the profitable transactions outweigh the unprofitable ones.

33

Restaurants give senior discounts because they eat at a different time of the day than the rest of us. They fill tables that would otherwise be empty, so are sought after.

Movies and amusement parks give children discounts because they know that young families would not come otherwise(leaving the kids at home is out of the question) but groups of teenagers still pay full price.

34

“accounting profit is revenue less cost. end of story”.

is what the fingers wanted to say!

35

Many of the seniors are on a ‘fixed income’ and mentally they have a ‘fixed allocation of expenditures’. How this works to McDonald’s advantage is the same reason that products are priced at .99 instead of 1.00 - McDonald’s sets up a mind set in the elderly that they are getting a deal or a ‘bonus’ just for them. So, the elderly by the millions decide to buy that cup of coffee, or a second cup of coffee. You can plot the numbers on a graph of increased coffee sales just by dropping the retail price for a selected group . . .your wholesale price (of production) is the same, and you lose a little per cup by not selling at ‘full retail’ but you gain all those millions of second cup buyers. To over simplify, if you stayed at full retail your percent gain would be 0, but if you adapted ‘special senior pricing’ that psychologically -induced millions into buying that second cup (or even the first), you gain literally millions of dollars each and every day.

For fun, you might want to contrast the ‘Southwest Airlines’ school of airline ticket pricing versus the ‘American Airlines’ school of ticket pricing in any given market. . .

36

“Accounting profit” is not economic profit. All you need to see to understand that is inflation. If the value of money declines by 50%, many transactions which would show an “accounting profit” would in fact be economic losses. But absolutely every exchange whatsoever, absolutely every present tense action trade, only occurs because strict epistemological economic profit is made from receiving something of more value than that which is given away in exchange.

Your statement would perhaps be correct if you listed a giant assumption: ASSUMING THE SUBJECTIVE VALUE OF “MONEY” REMAINS CONSTANT, which of course it is by definition of trade NOT constant every time it is traded, even irrespective of any changes in the quantity of money.

Here’s Mises on “accounting”.

“Every businessman includes in his normal cost accounting the compensation for losses which regularly occur in the conduct of affairs. “Regularly” means in this context: The amount of these losses is known as far as the whole class of the various items is concerned. The fruit dealer may know, for instance, that one of every fifty apples will rot in this stock; but he does not know to which individual apple this will happen. He deals with such losses as with any other item in the bill of costs.” Part 1, Chapter VI. Uncertainty in paragraph 1.VI.21

“Nor are the assets and liabilities consisting in cash exempt from the indeterminacy inherent in all business accounting items. They depend on the future constellation of the market no less than any item of inventory or equipment. The numerical exactitude of business accounts and calculations must not prevent us from realizing the uncertainty and speculative character of their items and of all computations based on them.” Part 3, Chapter XII. The sphere of economic calculation in paragraph 3.XII.5

"Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence of acting that always deals with the uncertain future." Part 3, Chapter XII. The sphere of economic calculation in paragraph 3.XII.39

“Monetary calculation reaches its full perfection in capital accounting. It establishes the money prices of the available means and confronts this total with the changes brought about by action and by the operation of other factors. This confrontation shows what changes occurred in the state of the acting men’s affairs and the magnitude of those changes; it makes success and failure, profit and loss ascertainable.” Part 3, Chapter XIII. Monetary calculation as a tool of action in paragraph 3.XIII.5

"Under capitalism the arithmetical operations required for cost accounting and the confrontation of costs and proceeds can easily be effected as there are methods of economic calculation available. However, cost accounting and calculation of the economic significance of business projects under consideration is not merely a mathematical problem which can be solved satisfactorily by all those familiar with Part 4, Chapter XVI. Prices in paragraph 4.XVI.58

“Cost accounting is therefore not an arithmetical process which can be established and examined by an indifferent umpire. It does not operate with uniquely determined magnitudes which can be found out in an objective way. Its essential items are the result of an understanding of future conditions, necessarily always colored by the entrepreneur’s opinion about the future state of the market.” Part 4, Chapter XVI. Prices in paragraph 4.XVI.69

“The capital concept is operative as far as men in their actions let themselves be guided by capital accounting. If the entrepreneur has employed factors of production in such a way that the money equivalent of the products at least equals the money equivalent of the factors expended, he is in a position to replace the capital goods expended by new capital goods the money equivalent of which equals the money equivalent of those expended. But the employment of the gross proceeds, their allotment to the maintenance of capital, consumption, and the accumulation of new capital is always the outcome of purposive action on the part of the entrepreneurs and capitalists. It is not “automatic”; it is by necessity the result of deliberate action. And it can be frustrated if the computation on which it is based was vitiated by negligence, error, or misjudgment of future conditions.” Part 4, Chapter XVIII. Action in the passing of time in paragraph 4.XVIII.116

"Those who have seen in this fact something puzzling and contradictory have been misled by a misconstruction of monetary calculation and capital accounting. They attempt to assign to capital accounting tasks which it can never achieve. Capital accounting is a mental tool of calculating and computing suitable for individuals and groups of individuals acting in the market economy. Only in the frame of monetary calculation can capital become computable. The sole task that capital accounting can perform is to show to the various individuals acting within a market economy whether the money equivalent of their funds devoted to acquisitive action has changed and to Part 4, Chapter XVIII. Action in the passing of time in paragraph 4.XVIII.134

"It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits. If the annual depreciation quotas are determined in such a way as not to pay full regard to the fact that the replacement of worn-out equipment will require higher costs than the amount for which it was purchased in the past, they are obviously insufficient. If in selling inventories and products the whole difference between the price spent for their acquisition and the price realized in the sale is entered in the books as a surplus, the error is the same. If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners whose demand for higher pay is satisfied by the easygoing employers who think that they are getting richer from Part 4, Chapter XX. Interest, credit expansion, and the trade cycle in paragraph 4.XX.36

37

It’s the product of the current government-supported oligopolies. It’s oligopolistic competition. They can produce more money without lowering the price. If there are more competitors, they would lower the cost, since consumers would have more options to choose from.

38

rtr states:

the act of baking bread shows that at the moment of baking bread the baker is profiting more than “the cost of gas, flour, labour, yeast, etc.”. If the baker at the moment of baking was NOT profiting more than “the cost of gas, flour, labour, yeast, etc.”, he would NOT bake the bread.

this is where you part company with the real world. when the baker bakes his load, he expends a known amount of money. his inventory now includes one loaf of bread. note there is no accounting profit until a sale is effected. the loaf of bread is baked only on the expectation of a sale at a profitable price. check with the s.e.c. if you don’t believe me. if the baker has decided to lure new customers into his bakery with “crazy prices” (ie below his cost of production), he will register a real monetary loss on every loaf sold. obviously if he continue long enough down this road, or bakes enough loaves he will eventually go broke via this “loss leading” strategy. many times companies do underprice their products relative to costs (going for market share, poor accounting, etc) and end up in liquidation. if expectations were the same as real profits, well..show me one businessman who isn’t optimistic about his future prospects.

sadly, it’s only when the cash-register rings that the verdict is drawn. and to reiterate, it’s not one sale, but the average profit/loss over all sales that sees the concern flourish or die.

39

You fail to account that value is subjective. You fail to account that the baker values baking the bread more than not baking the bread at the moment he bakes the bread, for whatever subjective reasons entirely his own. It doesn’t matter if others don’t value the baker’s action until the product of the bakers action is offered for exchange by the baker to those others AT A FUTURE TIME. Nobody is omniscient. And even if others at a future time value the baker’s production less than what the baker valued his production AT A PAST TIME, if he trades his production away anyway IN PRESENT TIME, he still values what he receives from the others in exchange more than the product he trades away. Less of a loss is still more profitable than more of a loss. What has occurred prior to that transaction is the baker too has lowered his subjetive valuation of his product, and given that lower subjective valuation, he still increases his value received from trade; the trade is generating positive economic value profit. The fundamental point is the baker would not trade away his bread if it was generating further loss, even if he considers his previous production activity as a loss.

If you are down $5,000 and you make $1,000 back you don’t say you are now $6,000 down, you don’t say you lost an additional $1,000, you say you made $1,000, and are now only $4,000 down. You are less down than you were before. “Made” is positive, “made” is profited, for that marginal $1,000, from that action. You confuse a specific limited action from a trade with previous actions as a whole (and that’s a huge fallacy in a lot of current economic theory). Trade is always generating present tense positive economic value no matter what the overall accounting is from lumping seperate different tense actions together. But this is an especially important point: only changing subjective valuations can generate loss (from voluntary market action, of couse violence and natural disasters can cause economic loss). And I’ll be getting the Nobel Prize for that demonstration (if not for in and of itself, for as it applies to the ABCT and any and all other business cycle theories for that matter), thank you very much. And that recognition is the key recognition to economic theory in the 21st century (there’s a whole lot of economic demonstrations that follow from it).

40

get in touch when you win the nobel prize, and i’ll shout you an epistomology-free mcdonalds coffee. just for the subjective hell of it.