AREC 384

  1. comparative advantage
    relatively better at something
  2. competitive advantage
    absolutely better at something
  3. what is a market?
    • buyer + seller + product
    • a group of institutions which is designed to facilitate the transfer of rights and titles to ownership in goods, services, properties
  4. what is food marketing?
    all business activities involved in the flow of food products and services from the point of initial agricultural production until they are in the hands of consumers, including supplies and activities upstream of the initial farmer
  5. 3 examples of diff food market activities
    • processing
    • transportation
    • storage
  6. why do we have markets? (2)
    • pair buyers with sellers
    • minimize transaction costs
  7. food marketing =
    value creation
  8. 4 types of utility
    • form utility
    • place utility
    • time utility
    • possession utility
  9. form utility
    altering the 'form' of an agricultural product into something that is desired by consumers
  10. place utility
    transporting the product to a location that is desired/convenient for the consumer
  11. time utility
    • delivering the product at a time that is desired by consumers 
    • ex. you can get oranges in AB in january
  12. possession utility
    • providing various options to take property of the product that are desired by consumers
    • utility you get from getting to have something in different ways, ex you can pay with cash debit credit paypal etc
  13. key marketing channel activities (4)
    • exchange 
    • processing
    • transportation
    • storage
  14. 4 assumptions for perfectly competitive market
    • many buyers and many sellers, so everyone is a price taker
    • homogeneous product
    • resources are completely and freely mobile
    • perfect knowledge
  15. caveat
    "purely competitive" or "almost perfectly competitive" markets that exist in real life bc its hard for perfectly competitive markets to really exist
  16. behavioral assumptions for firms
    • profit maximization
    • cost minimization
  17. behavioral assumptions for consumers
    utility maximization (subject to a budget constraint)
  18. law of demand
    inverse relationship bw the quantity of a good demanded and its price (ceteris paribus)
  19. 4 axioms of choice (demand) theory
    • reflexivity
    • non-satiation
    • completeness
    • transitivity
  20. static concept of demand
    • movements along the demand curve
    • aka changes in quantity demanded
    • static bc all other factors held constant
  21. dynamic concept of demand
    • shifts in the level of the demand function/curve
    • aka changes in demand
    • dynamic bc it considers effects of changes in other factors
  22. speculative demand
    • you're worried that prices are gonna go up so you buy more
    • current price influenced by expected future events and current conditions
  23. derived demand
    • demand schedules for inputs that are used to produce final products
    • ex. corn farmers have demand curve for inputs -> hog farmers have demand curve for corn as feed -> etc.
  24. elasticity
    a measure of the responsiveness of quantity demanded (or supplied) to a change in price
  25. own price elasticity of demand =
    (δQi/δPi) x (Pi/Qi)
  26. price elasticity is defined for a _______
    point on the demand curve
  27. arc elasticity
    • defined for a range along the demand curve
    • average elasticity between two points
  28. own-price elasticity of demand
    • if there's a change in price for good A, what is the change in quantity demanded of good A?
    • sign of own price elasticity will be - (if price [numerator] goes up, denominator [demand] goes down, and vice versa)
  29. what does elasticity equal for a perfectly elastic good ?
    ε = ∞
  30. what does elasticity equal for a perfectly inelastic good?
    ε = 0
  31. cross-price elasticity of demand
    • between two different goods
    • elasticity will be positive if goods are substitutes (price of one goes up, demand of other good goes up)
    • elasticity will be negative if goods are complements (price of one good goes up, demand of other good goes down) 
    • elasticity will be 0 if the goods are completely unrelated
  32. income elasticity of demand
    • the amount of the quantity of demand for a certain good changes if your income changes
    • positive: luxury goods
    • 0-1: normal goods
    • negative: inferior goods
  33. ε > 1
    • elastic demand
    • price and total revenue vary inversely
  34. ε = 1
    • unit-elastic demand
    • changes in price have no impact on total revenue, offset each other
  35. ε < 1
    • inelastic demand
    • price and total revenue vary directly,
    • P goes up, Q may drop but not by as much, so TR increases
  36. characteristics of own-price elastic goods?
    • many substitutes
    • non-necessities
    • storable
  37. characteristics of own-price inelastic goods?
    • unique
    • necessities (with few or no substitutes)
    • perishable
  38. flexibility
    • own price flexibility of demand is the inverse/reciprocal of own price elasticity of demand
    • measures percentage change in price associated with a percentage change in quantity, ceteris paribus
  39. total cost =
    fixed cost + total variable cost
  40. Average total cost =
  41. average variable cost =
  42. marginal cost =
  43. market supply function?
    horizontal summation of all ind. firm supply functions
  44. effect of time on shape of the supply curve?
    • long run: flattens it out
    • short run: steeper
  45. what factors affect the own price elasticity of supply?
    • what are things that would effect how responsive a firm is to prices?
    • supply managed goods - quota
    • biological constraints
    • how easy it is to produce the good (land, capital)
    • storability
    • climate
  46. price that oligopolist can offer?
    between monopolist price and perfect competition
  47. objective of monopolists
    maximize profits
  48. monopolist sets MR=
  49. social costs of pricing like a monopolist (P>MC)?
    • reduced consumer surplus
    • deadweight loss
    • rent-seeking
    • price regulation
  50. deadweight loss
    • producer side: inefficient use of resources
    • inability of willing consumers to enter the market who would have wanted to if price was at PC levels
  51. rent-seeking
    • rent: any money a firm gets that is more than MC
    • when you actively engage in activities that produce rent (lobbying, advertisements), these activities are costly on society?
    • ex. time spent on bills that benefit few firms
  52. price regulation
    • need government bodies to prevent abuse of market power by monopolies
    • if no market power was allowed, not much would get done (things wouldn't get invented)
  53. natural monopoly
    • when you have a huge fixed cost
    • need to spread over a lot of ppl
    • typically allowed to charge P>MC
    • limit tohow much above you can charge
  54. 1st degree price discrimination
    • ex. auction -> max WTP for each person
    • ideally firm would charge a price equal to a consumer's max WTP (reservation price)
    • this captures 100% of the consumer surplus
  55. 2nd degree price discrimination
    • ex. fast food combos, bulk discount, cheaper per unit, quantity discount
    • firms charge different prices (per unit) for different quantities purchased
  56. 3rd degree price discrimination
    • ex. the SPC card
    • firms cant observe individual reservation prices, but they can discriminate by category or group
    • grouping consumers allows them to set 2 MR curves so they can capture surplus of groups with high WTP and low WTP
  57. goods in a factor market (where firms are buyers?)
    • labour
    • capital
    • materials
  58. marginal value
    MV of an input consists of marginal product (MP) of the input, the price of the output
  59. monopsony
    • similar to monopoly but instead of a single seller, its concerned with a single buyer
    • restricts how much it purchases and ends up paying a lower price
    • ex: lumber mill in a small town, large processor, major sports leagues
  60. social costs of monopsony power
    • reduced producer surplus (labour, so OUR surplus is decreasing?)
    • deadweight loss
    • rent-seeking
    • regulation
  61. monopolistic competition
    • firms can charge P>MC, but the extent to which P is greater than MC is smaller than the case where the monopolist has no competitors to worry about
    • inefficient
    • no profit
  62. two key characteristics of a monopolistically competitive market
    • firms sell differentiated products that are highly (but not perfectly) substitutable for one another 
    • there is free entry and exit by firms
  63. is monopolistic competition socially undesirable?
    • it does lead to dead weight loss, but this loss is typically smaller than under a monopolistic situation
    • consumers pay more than marginal cost BUT they benefit from product diversity
  64. oligopolistic market
    characterized by a small number of firms (instead of a single firm) selling goods that may or may not be differentiated
  65. pricing under an oligopolistic market?
    falls in between that of perfect competition and a monopoly
Card Set
AREC 384
food market analysis