1. Created by Tad Mueller Northeast Iowa Community College

2. “Anyone can be an economist, All you must learn are two words, Supply and Demand” Chapter 8

3. The Food Marketing Process “Is a system of communication, conflict resolution, and coordination”

4. Consumer Demand Various quantities of a commodity that an individual is willing and able to buy as the price of the commodity varies holding all other factors constant. Various quantities of a commodity that an individual is willing and able to buy as the price of the commodity varies holding all other factors constant.

5. Consumer Demand Demand begins with individual consumer Demand begins with individual consumer Inverse relationship between quantity and price Inverse relationship between quantity and price Two dimensional, Price and Quantity Two dimensional, Price and Quantity http://www.freeworldacademy.com/newbizzadviser/pictseco/10.gif

6. Downward sloping demand As price goes up demand goes down As price goes up demand goes down Begin with individual’s utility function and a budget constraint Begin with individual’s utility function and a budget constraint If we only had steak once a month are desire (demand) for steak is high. If we only had steak once a month are desire (demand) for steak is high. If we had steak at every meal are desire (demand) is lower. If we had steak at every meal are desire (demand) is lower. China China

7. Per Capita Consumption in Pounds

9. Demand is a function of Price of substitutes Kraft Cheese vs. Generic Pork vs. Beef Sugar vs. Corn Sweetener Butter vs. Margin Less than 2:1 price ratio or better Soybean vs. Corn At 2.5:1 or better price ratio

10. Demand is a function of Price of complements Price of complements Pizza is a complement to cheese Pizza is a complement to cheese Consumer income Consumer income Higher income allows me to buy better products Higher income allows me to buy better products As price of products goes down my income goes up As price of products goes down my income goes up Gasoline Price Gasoline Price Taste and preferences Taste and preferences

12. Derived Demand P Q Retail pork chop demand Wholesale pork demand Farm level demand for hogs Demand for corn to feed hogs Demand for inputs to produce corn

13. Change in Demand? or in Quantity Demanded? Px Qx D1 D2 A B Moving from A to B due to a price decline is a change in quantity demand. A shift of the demand curve from D1 to D2 (B to C) is a change in demand. C

14. Five factors effecting aggregate demand for a product Exports Exports China China New product development New product development Ethanol Ethanol Advertising Advertising New information New information Dairy products help you loose weight Dairy products help you loose weight Product differentiation Product differentiation Kraft vs. Generic Kraft vs. Generic

15. Income effect on food demand Food is normal good Food is normal good Income demand Income demand Particularly important for meats Particularly important for meats The higher your income the more likely you are to buy beef The higher your income the more likely you are to buy beef Emerging economies Emerging economies China China Services are a normal good Services are a normal good Income services Income services Change your own oil or have a service shop do it. Change your own oil or have a service shop do it.

16. Supply The amount of a given commodity that will be offered for sale per unit time as the price varies, other factors held constant. The amount of a given commodity that will be offered for sale per unit time as the price varies, other factors held constant. The higher the price the more that will be offered for sale and vice-versa The higher the price the more that will be offered for sale and vice-versa

17. Market supply curves Q1Q1 P1P1 S1S1 S2S2 A B C Move from A to B is a change in quantity supplied due to a price decline. Move from B to C is a shift in supply. P2P2 Q2Q2 Q3Q3

18. Supply Derived from cost of production function Derived from cost of production function Assume that firms seek to Assume that firms seek to Maximize profits Maximize profits Minimize costs Minimize costs

19. What about Opportunity cost? The opportunity cost of commodity A is income forgone by not producing commodity B. The opportunity cost of commodity A is income forgone by not producing commodity B. Measures of opportunity cost Measures of opportunity cost Market value of input Market value of input Expected return over other cost of not producing commodity B. Expected return over other cost of not producing commodity B. http://res.realestateshows.com/wp-content/uploads/2007/09/picture-10.jpg

20. Variable Costs vs Fixed Costs Variable Costs Variable Costs Vary with production level Vary with production level Feed Feed Seed Seed Fuel Fuel Repairs Repairs http://jddealer.deere.com/sigourney/DealerFiles/DerrickInShopReduced.JPG

21. Variable Costs vs. Fixed Costs Fixed Costs Fixed Costs Remain Constant with Production Level Remain Constant with Production Level Depreciation Depreciation Interest Interest Taxes Taxes http://hffo.cuna.org/images/ctr_taxes.jpg

22. Cost Curves Average variable cost = AVC Average variable cost = AVC Total variable cost / Q Total variable cost / Q Variable costs change with Q Variable costs change with Q

23. Cost Curves Average fixed cost = AFC Average fixed cost = AFC Total fixed cost / Q Total fixed cost / Q Fixed costs do not change with Q Fixed costs do not change with Q Average total cost = ATC Average total cost = ATC = AVC+AFC

24. Cost Curves Marginal cost = MC Marginal cost = MC Change in total cost by producing 1 more Change in total cost by producing 1 more

25. Supply curve Upward sloping curve Upward sloping curve Optimal output @ MC = MR Optimal output @ MC = MR The last unit of input just pays for itself The last unit of input just pays for itself

26. Example Cost Curves for Corn UnitsFixedVariableTotalAFCAVCATCMC 1301601863461.231.432.660.60 1401601933531.141.382.520.75 1501602023621.071.352.410.90 160 2143741.001.342.341.15 1701602283880.941.342.281.40 1801602464060.891.372.251.80 1901602694290.841.412.262.30 2001602984580.801.492.292.90 2101603344940.761.592.353.60 2201603785380.731.722.444.40 2301604335930.701.882.585.50 2401604986580.672.072.746.50 2501605747340.642.292.937.60 Dr. John Lawrence, Iowa State University

28. Optimal Q at P=MC MC P1P1 P2P2 Cost QQ1Q1 Q2Q2

29. Cost curves and supply Shut down if Price < AVC Shut down if Price < AVC Lose on every unit produced Lose on every unit produced P>AVC make some payment to fixed cost P>AVC make some payment to fixed cost In the long run everything is variable In the long run everything is variable Short run defined by having fixed cost Short run defined by having fixed cost Shut Down Operate for Short-term Profitable

30. Supply shifts from change... in input prices in input prices in returns for competing enterprises in returns for competing enterprises in technology on yields or costs in technology on yields or costs in price of joint products in price of joint products in yield and/or price risk in yield and/or price risk institutional constraints institutional constraints http://www.econweb.com/MacroWelcome/sandd/notes.html

31. Worksheet Supply and Demand Supply and Demand

32. Economies of scale u Average total costs changes as the output of a firm changes u You can have increasing, decreasing or constant economies of scale. u Need to consider u Short run cost curve (SRATC) (Short Run Average Total Cost) u Long run cost curve (LRATC) (Long Run Average Total Cost)

33. US Pork Sector Study Financial results for 2000 1000 hd Net ProfitBreakevenNet Loss 1-265%24%11% 2-377%15%8% 3-579%16%5% 5-1078%13%9% 10-5077%12%11% 50-50090%5%5% 500+95%5%0%

34. US Pork Sector Study Stay in price until 2003 (%) 1000 hd$36$39$42$45$48 1-21636698690 2-31842718797 3-51839709094 5-101639759298 10-502249749196 50-500461889799 500+28508994100

35. Processing cost curves Specialized plants/equipment Specialized plants/equipment High fixed cost High fixed cost Low flexibility Low flexibility SRATC Q Cost

37. So what??? Short run price implications Short run price implications Supply chain management Supply chain management Open market or contract Open market or contract Packing plants Packing plants Ethanol plants Ethanol plants Soybean processing Soybean processing Biodiesel Biodiesel

38. Supply and Demand Summary Demand originates with individual consumer’s utility and budget constraint Demand originates with individual consumer’s utility and budget constraint Supply originates with individual firm’s marginal cost curve Supply originates with individual firm’s marginal cost curve

39. Grain Balance Sheet Incorporate supply and demand into one number Incorporate supply and demand into one number Relate S/U to price levels Relate S/U to price levels Supply to Use Ratio Supply to Use Ratio Carryover Carryover

40. Grain Supply and Use Total Supply Total Supply = Beginning Stocks + Production + Imports Total Use Total Use = Exports + Processing + Seed + Food + Feed and Residual + Carryover

41. Supply / Use Supply Supply Ending Stocks (Carryover) Ending Stocks (Carryover) Use Use All but carryover All but carryover Demand during the year Demand during the year Supply/Use Balance Sheets available from: Supply/Use Balance Sheets available from: http://www.extension.iastate.edu/agdm/crops/outlook/wisjuly08.html http://www.extension.iastate.edu/agdm/crops/outlook/wisjuly08.html http://www.extension.iastate.edu/agdm/crops/outlook/wisjuly08.html

42. Corn Balance Sheet (Supply)

43. Corn Balance Sheet (Demand)

44. Corn Balance Sheet (Carryover and Price)

48. Soybeans

49. USDA Reports Worksheet Worksheet USDA Crop Report USDA Crop Report http://www.nass.usda.gov/index.asp

50. Price elasticity A measure of responsiveness of the quantity supplied or demanded to changes in prices. A measure of responsiveness of the quantity supplied or demanded to changes in prices. Percentage change in quantity for a 1% change in price. Percentage change in quantity for a 1% change in price.

51. Relative measures Elastic Elastic Changes in quantity are greater than changes in price Changes in quantity are greater than changes in price 1% decrease in price causes 2% increase in demand 1% decrease in price causes 2% increase in demand Unit Elasticity Unit Elasticity Changes in quantity are the same as changes in price Changes in quantity are the same as changes in price 1% decrease in price causes 1% increase in demand 1% decrease in price causes 1% increase in demand Inelastic Inelastic Changes in quantity are less than changes in price Changes in quantity are less than changes in price 1% decrease in price causes ½ % increase in demand 1% decrease in price causes ½ % increase in demand

52. Price elasticity & total revenue TR (total revenue) = P (price) x Q (quantity) TR (total revenue) = P (price) x Q (quantity) Elastic demand Elastic demand P and TR inversely related P and TR inversely related Inelastic demand Inelastic demand P and TR directly related P and TR directly related

53. Income elasticity Percentage change in quantity for a 1% change in income Percentage change in quantity for a 1% change in income Positive for most food items Positive for most food items Relatively small i.e., 0.2 Relatively small i.e., 0.2

54. Cross-price elasticity Percentage change in quantity for a 1% change in price of a substitute or complement Percentage change in quantity for a 1% change in price of a substitute or complement Positive or negative Positive or negative Much smaller than Ep Much smaller than Ep

55. Examples of Ag elasticities EpEi Beef-.62.45 Pork-.73.44 Chicken-.53.36 Milk-.26-.22 Grapes-1.38.44 Lettuce-.14.23

56. Own and Cross Price Elasticities Ep of demand for beef Beef-.62 Pork.11 Lamb.01 Chicken.06 Other-.01 Income.45

57. Elasticities at various markets The greater the number of substitutes the more elastic the demand. The greater the number of substitutes the more elastic the demand. More elastic at retail level More elastic at retail level

58. Law Of One Price “Under competitive market conditions all prices within a market are uniform, after taking into account the costs of adding place, time, and form to the products.” “Under competitive market conditions all prices within a market are uniform, after taking into account the costs of adding place, time, and form to the products.”

60. Food for Thought Should food prices be determined by supply and demand or by the government? Should food prices be determined by supply and demand or by the government?