1. Chapter 7: Marketing Spencer Ag Business Curriculum 2012

2. Marketing… Represents all the economic activities involved in preparing and positioning the product for the final consumer Represents all the economic activities involved in preparing and positioning the product for the final consumer

3. Marketing System Stages Five stages that are dependent on one another Five stages that are dependent on one another “From Farm Gate to Dinner Plate” “From Farm Gate to Dinner Plate” Consuming Consuming Retailing Retailing Wholesaling Wholesaling Processing Processing Producing Producing

4. Marketing System Stages The marketing system: The marketing system: Adds utility to the final product Adds utility to the final product Increases the value of the final product Increases the value of the final product Provides for convenience in consuming the product Provides for convenience in consuming the product

5. The Concept of Utility Utility is described as: Utility is described as: Adding value to a product in an attempt to satisfy the needs and wants of the consumer. Adding value to a product in an attempt to satisfy the needs and wants of the consumer. Products have utility if: Products have utility if: The product meets the needs of the consumer and provides satisfaction while the product is being consumed. The product meets the needs of the consumer and provides satisfaction while the product is being consumed. Three Types of Utility Three Types of Utility

6. The Concept of Utility Form Utility… …makes products available in the form needed and wanted by consumers. …done by processing a product to change the physical form to a more convenient, usable form for the consumer: Bushel of wheat to bread Whole chicken to chicken strips

7. The Concept of Utility Place Utility… …makes products or services available at the place where the product is needed and wanted by consumers. …is an important variable to achieve consumer satisfaction. Modern Supermarket Walmart

8. The Concept of Utility Time Utility… …makes goods and services available to the consumer when they desire to consume the good or service. …storage function adds time utility to goods and services by storing the product until it is needed. Storing fresh fruit until off seasons 24 hour shopping centers

9. Utility and Marketing Five stages of marketing are the features that add utility to the product. Five stages of marketing are the features that add utility to the product. As the product passes through the system, each stage transforms the product and adds utility to it. As the product passes through the system, each stage transforms the product and adds utility to it. Thus, the ultimate consumer gets a product that fulfills their needs and wants. Thus, the ultimate consumer gets a product that fulfills their needs and wants.

10. Utility Summary Utility adds convenience Utility adds convenience Adding utility to a product is expensive and adds cost to the end product Adding utility to a product is expensive and adds cost to the end product Consumers are willing to pay extra money for a product to have utility. Consumers are willing to pay extra money for a product to have utility. The more utility (usable) a product has, the more desirable the product is in the market place. The more utility (usable) a product has, the more desirable the product is in the market place.

11. Dividing the Consumer’s Dollar: Who gets the consumer’s money? Who gets the consumer’s money? Remember: Remember: Utility costs money: adds value and adds cost. Utility costs money: adds value and adds cost. The more a product is processed, the more expense is added to the final cost. The more a product is processed, the more expense is added to the final cost. Two parts of the consumer dollar: Two parts of the consumer dollar: Farm Value Farm Value Marketing Bill Marketing Bill

12. Farm Value Represents the amount of every dollar spent on food that is eventually returned to the farmer. Represents the amount of every dollar spent on food that is eventually returned to the farmer.

13. Marketing Bill Amount of every dollar spent on food that is returned to the stages of the marketing process. Amount of every dollar spent on food that is returned to the stages of the marketing process. Remember Remember Utility costs money Utility costs money Highly processed vs. less processed (p. 7-4 & 7-5) Highly processed vs. less processed (p. 7-4 & 7-5) What is the difference in returns to the farmer? What is the difference in returns to the farmer? Why? Why?

14. Highly Processed Products Farm Value = 9% Farm Value = 9% Marketing Bill = 91% Marketing Bill = 91% Why is so little of the money returned to person who produced the product? Why is so little of the money returned to person who produced the product? Examples: Examples: Corn Corn Wheat Wheat Beef Beef

15. Lesser Processed Products Farm Value = 34% Farm Value = 34% Marketing Bill = 66% Marketing Bill = 66% Why does the farmer’s share increase with this type of product? Why does the farmer’s share increase with this type of product? Examples: Examples: Milk Milk

16. Consumer’s Dollar REMEMBER, the marketing bill represents the consumer’s willingness to pay more for products that: Meet their needs Are convenient Are easy to use

17. Price Directs the System Price directs the marketing system and is the sole factor that determines how much utility can be added to a product. Price directs the marketing system and is the sole factor that determines how much utility can be added to a product. 5 stages of a marketing system: (refer to page 7-5, figure 9.) 5 stages of a marketing system: (refer to page 7-5, figure 9.) Price signals are sent back and forth to set a market price that is acceptable to both ends. Price signals are sent back and forth to set a market price that is acceptable to both ends.

18. Price Influences Consumers send signals about price If price is too high, they do not buy the good or service If price is too low, they demand more of that good or service Production responds to price If market price is going up, producers make more If market price goes down, producers make less

19. In a free market, there is a constant attempt to locate a suitable price. Pricing efficiency: measures how well the marketing system works together to determine a price for the market place. This process is important to the overall health of a society. Why?

20. Economic Demand The amount of goods or services that a consumer is willing to purchase at a set price in a given period of time. The amount of goods or services that a consumer is willing to purchase at a set price in a given period of time. The consumer side of economics measures consumer’s tastes and preferences in regards to the price of products. The consumer side of economics measures consumer’s tastes and preferences in regards to the price of products.

21. Law of Demand The quantity of goods and services purchased is inversely related to the price of that good or service. The quantity of goods and services purchased is inversely related to the price of that good or service. In other words- In other words- The lower the price, the more goods or services the consumer will purchase. The lower the price, the more goods or services the consumer will purchase. The higher the price, the less goods or services the consumer will purchase. The higher the price, the less goods or services the consumer will purchase.

22. Law of Demand and Utility Consumers gain utility from the products and services they consume. Consumers gain utility from the products and services they consume. Utility: the amount of satisfaction that consumers gain from using a particular commodity. Utility: the amount of satisfaction that consumers gain from using a particular commodity. Diminishing marginal utility: As more products are consumed, utility decreases. Diminishing marginal utility: As more products are consumed, utility decreases.

23. Example of Utility: You are hungry and decide to eat pizza to satisfy your hunger. You are hungry and decide to eat pizza to satisfy your hunger. Utility is great for the first couple of pieces of pizza, but as the amount of pizza you consume increases, utility decreases. Utility is great for the first couple of pieces of pizza, but as the amount of pizza you consume increases, utility decreases. Thus, the old saying that if a little is good, more is better does not apply to the concept of utility in economics. Thus, the old saying that if a little is good, more is better does not apply to the concept of utility in economics.

24. Demand Curve in Economics The relationship between the quantity of product purchased and its price level. The relationship between the quantity of product purchased and its price level. Quantity Price

25. Demand Curve in Economics: Downward sloping line to the right Downward sloping line to the right Price is represented on the vertical axis Price is represented on the vertical axis Quantity is represented on the horizontal axis Quantity is represented on the horizontal axis Quantity Price

26. Demand Curve in Economics: As price of the product increases, demand for that product decreases. As price of the product increases, demand for that product decreases. As price or the product decreases, demand for that product increases. As price or the product decreases, demand for that product increases. Quantity Price

27. Demand Curve in Economics As more of the item is obtained, the price one is willing to pay for additional units decreases. As more of the item is obtained, the price one is willing to pay for additional units decreases. Quantity Price

28. Supply Curve in Economics Supply is… …the producer side of economics. …the quantity of a good or service available for purchase by the consumer in the market place.

29. Price is plotted on the vertical axis. Quantity is plotted on the horizontal axis. Supply curve is an upward sloping line to the right. Quantity Price

30. Supply Curve in Economics Supply for a product increases when the price for that product increases. Supply for a product decreases when the price for that product decreases. Quantity Price

31. Equilibrium Price The price in the market place where supply equals demand. The price in the market place where supply equals demand. Also known as the market clearing price. Also known as the market clearing price. The price where goods and service are purchased due to equal consumer demand for the product. The price where goods and service are purchased due to equal consumer demand for the product.

32. Micro - Macro Paradox Class discussion on how producers react to a change in price. Class discussion on how producers react to a change in price. Graphically illustrate with supply and demand curves on the chalk board. Graphically illustrate with supply and demand curves on the chalk board. Discuss short term vs. long run decisions and how the producer gets “trapped” Discuss short term vs. long run decisions and how the producer gets “trapped” Page 7-9 through 7-10 in the text. Page 7-9 through 7-10 in the text.

33. Economies of Size In production, producers generally attempt to lower cost of production per unit by increasing the size of their production. In production, producers generally attempt to lower cost of production per unit by increasing the size of their production. Economies of size refers to the spreading of fixed costs over more units of production to lower per unit cost of production. Economies of size refers to the spreading of fixed costs over more units of production to lower per unit cost of production.

34. Economies of Size Examples: Examples: Corn producer expands acreage from 400 acres to 500 acres of corn per year. Corn producer expands acreage from 400 acres to 500 acres of corn per year. How does this affect: How does this affect: Fixed cost per acre? Fixed cost per acre? Variable cost per acre? Variable cost per acre? Total cost per acre? Total cost per acre? The result, lowering the cost of production by achieving “economies of size.” The result, lowering the cost of production by achieving “economies of size.”

35. Price Taker Producers are known as price takers. They have no control in the market price of a product. They are too small to change production to move the price up or down. Thus, they must take the price offered in the market.

36. Marketing Strategies In agriculture, producers are price takers due to their inability to change price. In agriculture, producers are price takers due to their inability to change price. There are marketing strategies that allow the producer to search out a better price. There are marketing strategies that allow the producer to search out a better price. Cash Sale Cash Sale Forward Contract Forward Contract Futures Contract Futures Contract Option Contract Option Contract Hedging with futures or options Hedging with futures or options

37. Class Discussion Define and discuss the different strategies available to producers to try and alter the final price of a product. Define and discuss the different strategies available to producers to try and alter the final price of a product.

38. Marketing Summary What are the five stages of the marketing system? What are the five stages of the marketing system? Define utility. Define utility. Describe the three forms of utility. Describe the three forms of utility. Describe the relationship between utility and price of a product. Describe the relationship between utility and price of a product. Describe the relationship between the amount of processing and the producer’s share of the dollar. Describe the relationship between the amount of processing and the producer’s share of the dollar.

39. Marketing Summary What is the sole factor that determines how much utility is added to a product? What is the sole factor that determines how much utility is added to a product? From a consumer standpoint, how does price influence what is demanded? From a consumer standpoint, how does price influence what is demanded? From a producer standpoint, how does price influence what is supplied? From a producer standpoint, how does price influence what is supplied? Describe price efficiency in a free market. Describe price efficiency in a free market. What is economic demand? What is economic demand?

40. Marketing Summary Describe the Law of Demand. Describe the Law of Demand. Describe the Demand Curve in Economics. Describe the Demand Curve in Economics. Describe the Supply Curve in Economics. Describe the Supply Curve in Economics. What is equilibrium price? What is equilibrium price? What is meant by “economies of size?” What is meant by “economies of size?” In Agriculture, why are producers known as “price takers?” In Agriculture, why are producers known as “price takers?” What can producers do to search out a better price? What can producers do to search out a better price?