Derived Demand & Supply Marketing Margin Tomek & Robinson Chapter 6

Derived Demand and Derived Supply Consumer Demand =Demand at Retail =Primary Demand Retail Market (Retail Supply ???) Producer Supply = Supply at Farm level = Primary Supply (Farm Demand ???) Farm Market

Derived Demand and Derived Supply Consumers rarely interact directly with producers ___________ exits between consumers and producers Producers - processors – wholesalers/distributors – retailers – consumers How does one determine the eqb. price and quantity at the producer (farm) level and at the consumer (retail) level? Assumptions Marketing input prices remain constant Competitive market condition

Derived Demand and Derived Supply In reality…. One has to take into account supply and demand at the consumer (retail) level to get the consumer (retail) quantity and consumer (retail) price level. One has to take into account supply and demand at the producer (farm) level to get the producer (farm) quantity and producer (farm) price level. The difference between the two levels represents the cost of marketing (i.e. moving the product from the farm to the consumer … measure of the _________________.

Primary vs Derived Demand The derived (farm-level) demand is “derived” from the primary (or consumer) demand. The farm level demand for wheat is “derived” from the retail level “primary” demand for bread and other bakery products. P DR (Primary/consumer demand) Q

Primary vs Derived Supply SF (Primary/farm-level supply) The derived (consumer) supply is “derived” from the primary (or farm-level) supply. The supply of rice and cheese at the consumer level is “derived” from the farm level supply. Q

Derived Demand and Derived Supply Primary Demand (=Demand at Retail =Consumer Demand) Retail Market (Derived Supply =Retail Supply) Primary Supply = Supply at Farm level = Producer Supply (Derived demand =Farm Demand) Farm Market

Marketing Margins SR P SF PR PF DR DF Qs, Qd QR = QF

Introduction Marketing Margin Definition Simply the difference in price paid by consumers and the price received by producers. The price of a collection of services that are performed in getting the product from the producer to the consumer.

Derived Demand Shifters Introduction Derived Demand Shifters Prices are a result of the interaction of economic agents in a market. These interactions occur at all different levels of a market. Consumers rarely interact directly with producers Supply Chain exits between consumers and producers Producers - processors – wholesalers/distributors – retailers – consumers How does changes in supply and demand interact within these various market levels to determine prices and resource allocation. To accomplish this, marketing margins should be concerned => Business planning Shifters of the derived demand include Any primary demand shifter (e.g. income, price of substitutes and compliments, taste and preferences, population, ect.) Change in marketing costs (e.g., transportation, labor, storage, ect.)

Increase in Income SR P SF PR1 PF1 DR DF Qs, Qd QR = QF

Margin as a Marketing Cost Introduction Margin as a Marketing Cost Prices are a result of the interaction of economic agents in a market. These interactions occur at all different levels of a market. Consumers rarely interact directly with producers Supply Chain exits between consumers and producers Producers - processors – wholesalers/distributors – retailers – consumers How does changes in supply and demand interact within these various market levels to determine prices and resource allocation. To accomplish this, marketing margins should be concerned => Business planning A 2nd way to view the marketing margin is the cost of a collection of services that move and transform the farm product into a product for the final consumer. → Demand Side. Likewise, there are sellers of consumer food items in the retail market. → Supply Side

Derived Demand P Primary Demand (Demand at Retail Level, DR ) PR PF Qs, Qd P Primary Demand (Demand at Retail Level, DR ) PR PF Derived Demand (Demand at Farm Level, DF )

Derived Supply P SR: Derived S SF: Primary Supply PR PF Marketing Costs Likewise, the difference between the two supply curves reflects the marketing costs associated with each quantity of product supplied. Qs, Qd

Marketing Margins SR P SF PR Marketing Margin It accounts for the costs of a collection of services that is rendered between the farmers and the consumers. PF Note constant margin given parallel slope. DR DF Qs, Qd QR = QF QR must equal to QF

Marketing Cost and Size of Margin Introduction Marketing Cost and Size of Margin Assumption farm supply is perfectly inelastic (short-run) and 100% of farm output is transformed into retail output. Three cases distinguished by the supply of marketing services will be analyzed. Marketing services labor, capital, land/facility/materials Price of marketing services Wages, interest, rent Marketing margin accounts for a collection of services

Marketing Cost and Size of Margin Introduction Marketing Cost and Size of Margin Case 1: the supply of marketing services is perfectly elastic. It does not matter how much product is moved through the marketing system, the price for marketing services does not increase. Increase in the amount of product moving through the system does not bid up the price of labor, capital, electricity, etc. The classic view of marketing margins.

Marketing Cost and Size of Margin Introduction Case 2: the supply of marketing services is upward sloping. Increase in the demand for marketing services increases the price of those services.

Marketing Cost and Size of Margin Case 3: Economies of scale exists, leading to a downward sloping supply for marketing services.

Effects of a change in Marketing Margin Consider the case where transportation rates in the marketing service sector increase. Because transportation is an important component of food marketing, it means that the marketing margin is increased. Obviously, the positions of some supply and demand curves have to change to make allowance for the increased marketing margin. We are holding every other prices. Which curves have to be shifted? DF DR SF SR Qs, Qd P QR = QF PF PR

Effects of a change in Marketing Margin Since we are holding constant prices of other goods, income, population, and etc, no shift can occur in the primary demand curve. SF SR Qs, Qd P QR = QF PF PR Similarly, since we are holding constant the prices of inputs, prices of alternative outputs, and ect, no shift can occur in the primary supply curve. DF DR Hence, the only way to make room for the increased marketing margin is to have: (1) the derived demand curve shifts down (left), (2) the derived supply curve shifted up (left).

Effects of a change in Marketing Margin SF SR Qs, Qd P P’F P’R PR Q PF DF DR Q’ The retail price rises, the farm price falls, and the market volume decreases.