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comparative advantage
relatively better at something
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competitive advantage
absolutely better at something
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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
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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
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3 examples of diff food market activities
- processing
- transportation
- storage
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why do we have markets? (2)
- pair buyers with sellers
- minimize transaction costs
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food marketing =
value creation
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4 types of utility
- form utility
- place utility
- time utility
- possession utility
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form utility
altering the 'form' of an agricultural product into something that is desired by consumers
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place utility
transporting the product to a location that is desired/convenient for the consumer
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time utility
- delivering the product at a time that is desired by consumers
- ex. you can get oranges in AB in january
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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
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key marketing channel activities (4)
- exchange
- processing
- transportation
- storage
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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
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caveat
"purely competitive" or "almost perfectly competitive" markets that exist in real life bc its hard for perfectly competitive markets to really exist
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behavioral assumptions for firms
- profit maximization
- cost minimization
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behavioral assumptions for consumers
utility maximization (subject to a budget constraint)
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law of demand
inverse relationship bw the quantity of a good demanded and its price (ceteris paribus)
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4 axioms of choice (demand) theory
- reflexivity
- non-satiation
- completeness
- transitivity
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static concept of demand
- movements along the demand curve
- aka changes in quantity demanded
- static bc all other factors held constant
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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
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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
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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.
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elasticity
a measure of the responsiveness of quantity demanded (or supplied) to a change in price
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own price elasticity of demand =
(δQi/δPi) x (Pi/Qi)
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price elasticity is defined for a _______
point on the demand curve
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arc elasticity
- defined for a range along the demand curve
- average elasticity between two points
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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)
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what does elasticity equal for a perfectly elastic good ?
ε = ∞
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what does elasticity equal for a perfectly inelastic good?
ε = 0
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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
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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
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ε > 1
- elastic demand
- price and total revenue vary inversely
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ε = 1
- unit-elastic demand
- changes in price have no impact on total revenue, offset each other
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ε < 1
- inelastic demand
- price and total revenue vary directly,
- P goes up, Q may drop but not by as much, so TR increases
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characteristics of own-price elastic goods?
- many substitutes
- non-necessities
- storable
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characteristics of own-price inelastic goods?
- unique
- necessities (with few or no substitutes)
- perishable
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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
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total cost =
fixed cost + total variable cost
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Average total cost =
TC/Q
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average variable cost =
TVC/Q
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market supply function?
horizontal summation of all ind. firm supply functions
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effect of time on shape of the supply curve?
- long run: flattens it out
- short run: steeper
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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
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price that oligopolist can offer?
between monopolist price and perfect competition
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objective of monopolists
maximize profits
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social costs of pricing like a monopolist (P>MC)?
- reduced consumer surplus
- deadweight loss
- rent-seeking
- price regulation
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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
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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
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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)
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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
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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
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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
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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
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goods in a factor market (where firms are buyers?)
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marginal value
MV of an input consists of marginal product (MP) of the input, the price of the output
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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
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social costs of monopsony power
- reduced producer surplus (labour, so OUR surplus is decreasing?)
- deadweight loss
- rent-seeking
- regulation
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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
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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
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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
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oligopolistic market
characterized by a small number of firms (instead of a single firm) selling goods that may or may not be differentiated
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pricing under an oligopolistic market?
falls in between that of perfect competition and a monopoly
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