Pizza Hut.

Pizza Hut was found on June 15, 1958 by the two brothers, Frank and Dan Carney in Wichita (Pizza Hut, n.d.). An owner of a small building who wanted a nice business in the neighborhood approached the brothers. The Carneys were determined and borrowed $600 from their mother to set up this business, and bought some secondhand equipment as a start.

The building had only nine characters available for the name, and the brothers wanted the word “pizza” in it, which left them with three more characters to put into the name. The name Pizza Hut was eventually born when a family member suggested that the building looked like a hut.

Pizza Hut, which is now one of the world’s largest pizza franchises, opened its first franchise in 1959 in Topeka, Kansas. There are about 65,000 Pizza Hut franchises in 2012 (Pizza Industry Analysis 2013).Pizza Hut was ranked number one in 2008 in its category (Pizza Hut Franchise, n.d.).

Based on the law of demand, the quantity demanded of a good would decrease when its price increases (Sloman, Wride and Garratt 2012, p.32). This law can be applied to the situation of Pizza Hut. When the prices of their pizzas increase, the quantity demanded for their pizzas would decrease. The movement along the demand curve can show this change in quantity demanded, as shown in the figure below.

As shown in Figure 1, when the price of pizzas increases, the quantity demanded will decrease. This decrease in quantity demanded when the price increase is due to two main factors, which are the substitution effect and the income effect (Sloman, Wride and Garratt 2012, p.32). Pizza Hut is not the only pizza restaurant available in the market. Their market structure is monopolistic competition and have competitors such as Domino’s Pizza. Domino’s Pizza is a substitute of Pizza Hut because the products that they sell are the same. Therefore, when the price of Pizza Hut increases, people would choose to buy Domino’s Pizza to reduce their expenses. On the other hand, income effect causes less people to buy Pizza Hut when their price increases because it is not within their budget. Larger portion of their income is needed to buy the pizza, hence causing a burden.

As of today, a combo meal for two from Pizza Hut costs around RM29.90 (Pizza Hut, n.d.). The combo meal includes a regular 9-inch pizza, 2 bowls of soup, 4 pieces of garlic breadstix and 2 glasses of soft drink. Pizza Hut meals are considered as normal goods. When their income increases, demand for Pizza Hut increases.

The demand of pizzas from Pizza Hut depends on a few determinants, which include taste, income and price of other goods (Sloman, Wride and Garratt 2012, p.34). Taste of people affects the demand of pizzas from Pizza Hut because different people have different preferences. Some people would prefer the pizzas from Pizza Hut, whereas some people would prefer pizzas from their competitors. Besides that, the income of the people also determines the demand of their pizzas. Since pizzas are considered to be a normal good, the demand of pizzas increases when the people’s income increases. When income increases, people will be able to spend more, and they can choose to treat themselves by eating pizzas. This can be shown by a shift in demand curve, as shown in Figure 2 below.

The price of other goods affects the demand in a way that if Pizza Hut’s competitor charges a lower price, people would opt to go for the competitor brand. This is similar to the substitution effect. However, when the price of their complement decreases, demand for pizzas increases. For example, when price of the soft drink such as Pepsi decreases, more people would go and eat at Pizza Hut.

Based on the law of supply, the quantity supplied of a good increases when its price increases (Supply and Demand, n.d.). This is because they are willing to supply only when they can cover their marginal cost of production and make maximum profit out from what they have supplied. In addition to that, producer surplus is also maximized.

The supply of Pizza Hut depends on a few main factors, namely prices of factors of production and prices of related goods produced (Sloman, Wride and Garratt 2012, p.40). The supply would be lower if the price of factors of production increases. Examples of factors of production are ingredient, electricity, and labor. This rise in price of factors of production causes the supply curve to shift leftward, as shown in Figure 3 below.

When the quantity demanded and quantity supplied of Pizza Hut is equal, this situation is called equilibrium. The price in which this happens is called the equilibrium price. Any point on the graph that is above the equilibrium price shows a surplus, whereas any point on that graph below the equilibrium price shows a shortage. This is summarized in Figure 4 below.

The price elasticity of demand (PED) of pizza hut, which is the extend to which quantity demanded of their pizza would change when their price changes, is elastic. The price elasticity of demand can be calculated by taking percentage change in quantity demanded (%∆QD) over percentage change in price (%∆P).

On the other hand, the price elasticity of supply (PES), which measures the responsiveness of the quantity supplied to a change in price of the pizzas, is elastic as well. The price elasticity of supply is the percentage change in quantity supplied (%∆QS) over the percentage change in price (%∆P).

The price of pizzas of Pizza Hut is charged with additional charges of government tax and service charge. Since January 2011, a total of 6% of government tax that is imposed under Service Tax Act 1975 is charged to their customers.

The main goal of any company is to maximize their profit. However, alongside that Pizza Hut had their other goal as well, which is to provide their customers with satisfactory services and moderate pizzas. Below shows the sale of Pizza Hut throughout the year of 2007.

(Sales for Pizza Hut, n.d.)

It shows that the sale of Pizza Hut has been quite consistent, without large fluctuation. Only at the end of the year, which is Week 52, the sales were much lower compared to the previous weeks.

In the short-run production, a firm can produce and various its quantity of inputs to maximize its profit in a period of time frame. Fixed cost cannot be changed in the short-run, but it is possible to change the variable cost to maximize profit. In the short-run, Pizza Hut can change their variable costs, which are labor, raw materials and energy. To adjust to any changes in economics of the world such as when there is an economic crisis or when economy is bad, Pizza Hut is able to change its variable cost. For example, less people will buy their pizzas when economy is bad. This causes their quantity supplied to decrease. This means that less labor and energy is needed, so the company can make necessary arrangements about the staffs that are working with them. The amount of raw materials that they have to buy will also be reduced as their production is reduced. Based on a case study in 2001 by Saeed, Jain and See, Pizza Hut serves more than 1.7 million pizzas every day. Pizza Hut’s raw material for a year includes 360 million pounds of cheese, 700 million pounds of flour, 3.6 million heads of animals for the meat they use, 525 pounds of tomato, and 50 million pounds of pepperoni. These are huge amounts so if the quantity demanded has dropped, the quantity supplied should be reduced as well to save on raw materials. If the quantity demanded is less than the quantity supplied, there will be a deadweight loss.

Similarly, if economy is good, they will have to increase their quantity supplied because the quantity demanded of their goods will increase. In the short-run, they can only hire more labor and buy more raw materials to support the higher level of production. All of these that can be varied in the short-run are called variable cost.

In the long-run production, fixed costs of Pizza Hut can be changed to adapt to the economic situation. If economy is good and is expected to be good for a long-run, the company can plan to extend their business. In usual case, the company will expand their outlet. This cannot be done in the short-run because Pizza Hut has to buy a bigger land to expand. It also cannot be done in the short-run because things are unpredictable, and may lead to a loss to the company. Generally, long-run supply is the most elastic and short-run supply is just somewhat elastic.

According to the equi-marginal principal, consumers that consume goods of a certain combination in which the ratio of their marginal utility equals to the ratio of their price is maximizing their utility from their income (Sloman, Wride & Garratt 2012, p.105). Their consumption choice is based on two factors, which are consumption possibilities and preferences. Consumption possibilities are basically what they can afford based on their limited income. For example, if their income is low, they cannot eat at an expensive restaurant every day or else it will be out of their budget. Different people have difference preferences as to which good they would prefer to maximize their utility, and this result in marginal rate of substitution. Since Pizza Hut and their competitor, Domino’s Pizza are perfect substitutes, their indifference curve can be shown as below in Figure 5.

Some people would prefer Domino’s Pizza, whereas some people would prefer Pizza Hut. Some people’s preferences are also based on customer’s loyalty.

The market is getting more and more competitive day by day. To compete with their competitors, Pizza Hut has to come up with few effective strategies to gain their customer’s loyalty. Other than coming up with more attractive deals, they can gain customer’s loyalty by using a loyalty card that collects points in every transaction. Interesting rewards should be given to those who have collected more than a certain number of points. Besides that, they should come up with more varieties of pizzas to attract customers. By doing this, Pizza Hut can expect an increasing sale in the future.

Reference List

Sloman, J., Wride, A. and Garratt,D. (2012) Economics. 8th ed. Italy: Pearson Education.

Pizza Hut (n.d.) Pizza Hut Worldwide History. Available from: http://www.pizzahut.com.my/dining/about-history.html [Accessed 19 October 2013]

Pizza Hut (n.d.) Hut’s Delight. Available from: http://www.pizzahut.com.my/dining/menu-combomeal.html [Accessed 19 October 2013]

Franchise Help (n.d.) Pizza Industry Analysis 2013- Cost & Trends. Available from: http://www.franchisehelp.com/industry-reports/pizza-industry-report [Accessed 20 October 2013]

Franchises (n.d.) Pizza Hut Franchise Review. Available from: http://franchises.about.com/od/pizza/fr/pizza-hut.htm [Accessed 22 October 2013]

Lynch, K., Dawson, K., Mai, Q. and Patel, B. (n.d.) Forecasting Sales for Pizza Hut Restaurant In A Volatile Market. Available from: https://www.student.gsu.edu/~kdawson3/project%202%20report.doc [Accessed 22 October 2013]

Supply and Demand (n.d.) Available from: http://highered.mcgraw-hill.com/sites/dl/free/0073523232/936679/Sample_Chapter.pdf [Accessed 23 October 2013]

Saeed, M., Jain, K.K. and See, E. (2001) Pizza Hut Malaysia. Available from: http://www.delhibusinessreview.org/v_2n1/dbrv2n1h.pdf [Accessed 23 October 2013]