AGRICULTURAL ECONOMICS 220 Agricultural Marketing

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AGRICULTURAL ECONOMICS 220Agricultural Marketing

• Theme 3 Price formation, determination, and
  market equilibrium

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3.1 Price forming process

• Mostly based on exchange function - buy and sell
• Role of prices
• Prices provide information in the total marketing
  process, help communication, co-ordination
• It provides information important for decision
  making
• Prices lead and influence production decisions,
  consumer decisions, marketing decisions.
• Assist with decisions between substitutes -
  relative prices

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3.1 Price determination vs discovery(1)

• The interaction between demand and supply
  determines the equilibrium price.
• When S D market is in equilibrium at PE
• Shifts in D and/or S curves - new PE
• Relative strength of demand vs supply determines
  their position in market
• Now consider all the factors that influence
  demand and supply, which we discussed in theme
  2.12.2

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3.1 Price determination vs discovery(2)

• Price determination by supply and demand is only
  the first stepHow are prices discovered in the
  market?
• Techniques for price discovery in market
• 1. Individual decentralised negotiations
• Sellers negotiate independent with buyer
• Information, ability and negotiation power
• 2. Central markets/Organized exchange
• Market place, auction

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3.1 Price determination vs discovery(3)

• Techniques for price discovery in market
• 3. Price formulas
• Advantage of market prices with physical
  transport to market
• Thus market price adjusted with formula
• 4. Group bargaining
• Collective, easy if few spatially concentrated
  producers, may negotiate before production
• 5. Administered prices
• Government normally involved, floor prices etc.

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3.1 Before demand and supply equilibrate .

• Consumers and producers have to access all the
  aspects of price elasticities of their
  counterpart
• Now they can make use of the following Pricing
  strategies to calculate the prices they want/need
  to negotiate for.
• Pricing Strategies
• Cost plus methods (Full cost, break-even)
• Market orientated methods (skimming, penetration,
  discrim.)
• Psychological pricing (quality, odd, lining,
  customary)
• Geographical pricing (FOB, Zone)
• Administered pricing (imposed by external body)

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3.1 Market equilibrium (1)

• Shifts in D and/or S curves Market
  disequilibrium Commodity surplus / shortage
• Four possible events/shifts of demand and/or
  supply
• Demand decreases, supply unchanged Lower
  quantity moves at higher price
• Supply increases, demand unchanged Increased
  quantity moves at lower price
• Demand increases, supply increases Increased
  quantity moves at same price if elasticities are
  equal
• Demand decreases, supply decreases Lower
  quantity moves at same price if elasticities are
  equal

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3.1 Market equilibrium (2)

• Length of adjustment period
• Expect that LT-elasticities are larger than
  ST-elasticities . Producers and consumers have
  time to respond
• Producers expectations lead to cycles in prices
  - Cobweb adjustment style
• Es Ed Constant cycle
• Es lt Ed Convergent cycle
• Es gt Ed Explosive cycle

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3.1 Does the market solve for PE?

• LOOP Law of one price
• Law states that under competitive market
  conditions all prices within a market are
  uniform, after taking into account the costs of
  adding place, time, and form utility to products
  within the market.
• If LOOP applies - price efficiency (PE solved in
  market)
• If LOOP does not apply (PE not solved in market)
  - inefficient due to
• Few big dominating firms
• Price manipulation
• Poor market information

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3.1 Farm gate prices, retail prices and price
support

• Agricultural price movements or the behaviour of
  farm prices
• When do we have a floor price or a ceiling price?
• Guaranteed and fixed prices
• Prices and income play key roles in marketing
  decisions
• In the long run we expect prices to ensure
  efficient allocation of resources
• Fluctuating prices necessary for efficient
  market, however...

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3.1 Behaviour of farm prices

• Forces influencing farm prices
• Supply conditions (weather, diseases, financing,
  risk, etc.)
• Demand conditions (Income, consumer preferences,
  exports, population demogr.)
• Food marketing sector (value adding strategies)
• Government (policy effects)
• Global influences - e.g. policy of another gov.

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3.1 Guaranteed and fixed prices

• Governmental regulatory measures
• Price supports
• Government purchase programmes,
• Limiting production,
• Tariffs and quantitative restrictions on imports
• Price controls
• Fixed prices,
• Floor price Prices set above PE generates
  surplus of supply (dumping on world markets)
• Ceiling price Prices set below PE generates
  shortage in markets (black markets, out-of-stock
  problems