AEC 305 Final

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What do producers want from our food marketing system?
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Fair(high) prices and profit Market information on consumer demand and prices Availability of inputs at a “reasonable cost Access to markets both domestic and abroad Close proximity to deliver products Ability to add value to capture a greater share of food marketing dollar “reasonable” regulations
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What do consumers want from our food marketing system?
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Fair(low) prices Abundant supplies at all times of the year Variety of products/product forms/sizes Convenience Quality/Fresh Food Safe/Nutritious/Healthy Food Nutrition Labels Multiple payment options Organic/NonGMO/No antibiotic Acceptable animal care measures Environmentally friendly production methods
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Conventional Mass Food Production VS Local/Small/Sustainable Food Producers
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Non-Organic VS Organic GMO VS Non-GMO Antibiotic use and animal care standards in livestock/meats
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Provide some examples of how the government can influence what food/drinks/ag products we consume and the price we pay
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Education Buy surplus items Tax Restrict consumption, production, advertising, and imports and exports Promote substitutes for healthy foods/drinks, trade, and competition Regulate Legislate and fund
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Marketing Bill
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Represents the annual cost for the food sector’s marketing services, including transporting, processing, and distributing domestic farm foods. It is the difference between total consumer expenditures for domestically produced foods and the corresponding farm value of raw US agriculture commodities
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Marketing Margin
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The difference between the retail price and the farm value of a particular food item
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Market Basket
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The value of a FIXED quantity of US farm-originated food to track US food price changes in grocery stores
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Index Numbers
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A unitless summary statistic that allows one to compare changes in for a given variable over a given time period
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To construct an index number, one makes decisions on:
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Items to include Weights (must add up to 100%) Base period
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Nominal Prices
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Actual observed prices
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Real Prices
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Nominal prices adjusted by the rate of inflation
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Selected Factors Impacting Food Price Inflation
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Biofuel production World crop supplies Consumer incomes Value of the US dollar Ag commodity prices Energy/Transporting costs Weather
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Consumer Demand
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A demand schedule represents the quantities that an individual will consume at alternative prices at a given time and a given place, holding all other factors constant
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Factors of Demand
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Individual Income Individual tastes and preferences Prices of substitutes and commodities Number of consumers
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Movement along the Demand Curve
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A change in the own price of the good or service (i.e change in the quantity demanded)
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Shift of the Demand Curve
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A change in income, taste and preference, and/or the prices of substitutes and commodities (i.e change in demand)
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Own Price Elasticity of Demand
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Measures the responsiveness of changes in the quantity demanded to small changes in price, holding all other factors constant.
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Quantity Response for a Given Price Change
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Inelastic Demand: % change in quantity is LESS than the % change in price (quantity demanded is not very responsive to price changes) Elastic Demand: % change in quantity is GREATER that the % change in price (quantity demanded is very responsive to price changes)
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Factors Affecting the Magnitude of Own-Price Elasticities
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Availability of substitutes Proportion of budget spent on item Time horizon (adjustment period) Degree of Necessity
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Relationship of Price Elasticity of Demand to Changes in TR
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Elastic: Increase price = decrease in TR / Decrease price = increase in TR Inelastic: Increase price = increase TR / Decrease price = decrease TR
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Cross Price Elasticity
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Measures how the quantity demanded of one commodity responds to changes in the price of another commodity, holding all other factors constant.
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Income Elasticity
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Measures the responsiveness of quantity demanded to income changes, holding all other factors constant
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Normal Good
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Income greater than 0
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Inferior Good
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Income less than 0
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Supply Schedules
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An individual supply schedule represents the quantities that an individual firm will produce at alternative prices at given place and time, holding all other factors constant.
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Inelastic Supply
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% change in quantity is LESS than the % change in price (quantity supplied is not very responsive to price changes)
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Elastic Supply
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% change in quantity is GREATER than the % change in price (quantity supplied is very responsive to price changes)
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Factors Affecting Supply Elasticities
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Available resources Ability to store the commodity for later sale Risk and Ease of entry and exit Prices of alternative commodities competing for resources Government Policies Time
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Derived Demand
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The derived (farm level) demand is derived from the primary (consumer or retail) demand I.E the farm level demand for wheat is derived from the retail level primary demand for bread and other bakery products
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Derived Supply
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The derived (consumer or retail ) supply is derived from the primary (farm level) supply I.E the supply of peaches at the consumer level is derived from the farm level supply
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Market STructure
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Number of buyers and sellers Product similarity Ease of entry/exit Info available
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Market Conduct
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Price decisions Non-Price Decisions Quantity decisions
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Market Performance
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Pricing efficiency Operational efficiency Profits/Distribution Consumer Preferences Information
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Know the charts of Comparisons of Industry Market Structures
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Perfect competition Monopolistic Competition Oligopoly Monopoly
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Benefits of Imperfect Competitions
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Consumers: Product Variety/Economic of scale can lead to lower prices Producers: Access to improved technologies to lower costs/more markets for producers
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Concerns of Imperfect Competitions
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Market Power can lead to lower producer prices and higher consumer prices Limits entry/innovations of new firms Excess capacity Excessive advertising Limited information Excessive profits Eliminate producers
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Accounting Profits
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represent total revenue less “accounting costs” which represents items such as labor, rent, interest expenses
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Economic Profits
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Represents total revenue less “economic costs” where economic costs are explicit “accounting costs” PLUS implicit “opportunity costs” which accounts for a rate of return on all resources (land, labor, capital and management) interested in the business
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Monopsony
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single buyer
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Oligopsony
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few buyers who closely monitor and react to the purchasing behavior of their competitors
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What is concentration?
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a measure of the relative size(and thus market power) of an industry’s largest firms
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What is Market Power?
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A firm is said to possess market power if it is able to raise(lower) its price as a seller(buyer) above(below) competitive levels – characteristics of firms who can restrict entry and possess a high degree of concentration
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Concentration Ratios
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To evaluate the degree of concentration, economists calculate the percentage of market share possessed by the largest firms
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Higher concentration ratio
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A higher concentration ratio indicated a larger degree of market concentration and raises concerns over firms abusing their market power (charging higher prices to consumers offering lower prices to producers relative to a more competitively determined price, limiting entry, constraining the degree of market information, and constraining output.
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Low concentration ratio
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Indicated that firms have limited market power
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Types of Advertising
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Brand name Generic
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Brand Name
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Coke VS Pespi Attempts to increase market share of the product Attempts to shift and alter the shape of the demand curve
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Generic
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Instead of advertising a particular brand name Attempts to increase the entire market to enhance producer profits shifting both the primary and derived demand to the right – thus may not alter the slope of the demand curve
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Price Determination
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Theoretically illustrating equilibrium prices and quantities by analyzing factors affecting supply and demand
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Price Discovery
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A mechanism (or processes) by which buyers and sellers find and agree on a mutually satisfactory price for a transfer of ownership of something.
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Ag Price Discovery Systems
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Individual/Private negotiations Cash/spot markets without negotiations Auctions Group Negotiations/Collective bargaining Contracts and Vertical intergration Future markets Government intervention
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Vertical Intergration
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Occurs when successive stages of marketing and processing or marketing and production ar elinked together through ownership I.E Wineries that own and operate vineyards
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Production Contract
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a formal agreement along buyers and sellers which specifies required production practices, along with delivery and payment terms, often agreed to before production is initiated. Contractors, NOT FARMERS, retain ownership of the commodity
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Marketing Contract
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A formal agreement among buyers and sellers which specifies various variables such as delivery dates, quantity levels, and a price schedule without specific guidelines on production practices. Farmers, NOT CONTRACTORS, retain ownership of the commodity
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Buyer Contract Advantages
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Input supply control Reduced price risk Quality control Potential to reduce competition through restricted entry Potential to enhance profits and Market pwer
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Seller Contract Advantages
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Guaranteed Market Reduced Price and Income Risk Information about consumer preferences Access to credit Access to technology/Inputs to lower costs/Improve quality
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Seller Contract Concerns
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Loss of independence Changes demanded by contractor Price adjustments Long term investments associated with short term contracts Quantity requirements in case of crop failures/livestock deaths Potential to great competition among growers in terms of prices and quantity levels Reduced market information Hurts remaining spot or cash markets
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Future Trends of Contracts
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Likely to continue to grow Demand for differentiated products requires quality control Tractability of products Environmental and other regulations will require firms to have greater control over management of production systems Large farms will continue to grow and depend more on contracting to minimize their price and income risks and to have access to credit
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Leading US Ag Export Markets
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China Canada Mexico
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Decline in Exports
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Abundant Supplies Stronger US $ Sluggish economic growth
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Increase in Imports
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Demand for Diversity Year Round food demand Ethnic population growth
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An increase in the value of the US dollar:
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Increase the amount that foreign consumers will have to pay for US goods and will decrease US exports, holding all other factors constant.
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Perfect Competition
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Large number of sellers Sellers too small to affect market each seller has an identical product Free Entry/exit no ability to drive the price
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Monopoly
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One producer unique product no substitutes impossibly entry complete control of price
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Monopolistic
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Large number of sellers easy entry different products small amount of market power
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Oligopoly
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Few large producers large market power some barriers to entry product can be identical or different mutually interdependent

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