Marketing Chapter #7

What is Marketing? u All the economic activities involved in preparing and positioning the product for the final consumer

What is Utility? u Customer satisfaction u consumer needs

Form Utility u In what form is a product available u Whole chicken u Chicken parts u Cooked chicken u Each step adds value

Place Utility u Where is a product available u Convenience

Time Utility u When is a product available

What percentage of the final product does the producer receive? u Dairy farmer = 34% for milk u Grain products = 9%

What is the Law of Demand? u At any point in time, the rational consumer will take more only at a lower price. u Ex: How many hamburgers would you buy at $2? u How many hamburgers would you buy at $1? u How many hamburgers would you buy at 50 cents? u How many hamburgers would you buy at 25 cents?

Quantity Price Demand Law of Demand

What is the Law of Supply? u Producers are willing to offer more only at a higher price u Ex: How many acres of wheat will you plant if wheat is worth $2 / bu.? u How many acres of wheat will you plant if wheat is worth $4 / bu.? u How many acres of wheat will you plant if wheat is worth $8 / bu.?

Law of Supply Price Quantity Supply

Law of Supply & Demand Price Quantity Demand Supply

What is Equilibrium Price? u Price is determined where supply and demand curves intersect

Law of Supply & Demand Price Quantity Demand Supply

What is Price Discovery? u The process of searching for the Equilibrium Price u Many things involved that can alter supply and demand u Government incentives u Weather u World Trade u Surplus

How does change in supply affect price, if demand stays the same? Price Quantity Demand Supply 1 Supply 2

Economies of Size u Within Limits, larger businesses (farms) can produce at a cheaper cost per unit of production u Eventually, as business becomes too large, costs increase

Futures Market

Futures Contract u Futures Contract = a contract calling for delivery of a carefully described commodity at some later time u Not intended for actual delivery of commodity, but price discovery for later period u Method of transferring risk of cash market of producer to speculator in futures market

Basis u The difference between cash market and futures market u Cash - Futures = Basis u usually negative

Forward Pricing u Forward Contract = a contract which locks in a price for later delivery u Forward Price = Futures Price + Basis u Ex: Futures Contract = $3.10 u Basis = -20 cents u Forward Price = $ = $2.90

What are Put Options? u The Right to sell futures contracts at specific prices. u Strike Prices offered in 10 cent intervals for corn u Want to buy a Put Option for $3.10 corn u Basis = -.20Premium =.12 u Price Floor = Strike Price + Basis - Premium u Price Floor = $ = $2.78

What are Put Options? u What if price goes up? u Futures = $3.50Cash = $3.30 u Net Price = Cash Price + Option Value - Premium u Net Price = $ = $3.18 u What has the Put Option accomplished?

What are Put Options? u What if the price goes down? u Futures = $2.50Cash = $2.70 u Net Price = Cash Price + Option Value - Premium u Net Price = $ = $2.78 u What has the Put Option accomplished?