Marketing

Chapter #7

What is Marketing?

All the economic activities involved in preparing and positioning the product for the final consumer

What is Utility?

Customer satisfaction consumer needs

Form Utility

In what form is a product available Whole chicken Chicken parts Cooked chicken

Each step adds value

Place Utility

Where is a product available Convenience

Time Utility

When is a product available

What percentage of the final product does the producer receive?

Dairy farmer = 34% for milk Grain products = 9%

What is the Law of Demand?

At any point in time, the rational consumer will take more only at a lower price.

Ex: How many hamburgers would you buy at $2? How many hamburgers would you buy at $1? How many hamburgers would you buy at 50

cents? How many hamburgers would you buy at 25

cents?

Quantity

Price Demand

Law of Demand

What is the Law of Supply?

Producers are willing to offer more only at a higher price

Ex: How many acres of wheat will you plant if wheat is worth $2 / bu.?

How many acres of wheat will you plant if wheat is worth $4 / bu.?

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?

Price is determined where supply and demand curves intersect

Law of Supply & Demand

Price

Quantity

Demand

Supply

What is Price Discovery?

The process of searching for the Equilibrium Price Many things involved that can alter supply and

demand Government incentives Weather World Trade Surplus

How does change in supply affect price, if demand stays the same?

Price

Quantity

Demand

Supply 1

Supply 2

Economies of Size

Within Limits, larger businesses (farms) can produce at a cheaper cost per unit of production

Eventually, as business becomes too large, costs increase

Futures Market

Futures Contract

Futures Contract = a contract calling for delivery of a carefully described commodity at some later time

Not intended for actual delivery of commodity, but price discovery for later period

Method of transferring risk of cash market of producer to speculator in futures market

Basis

The difference between cash market and futures market

Cash - Futures = Basis usually negative

Forward Pricing

Forward Contract = a contract which locks in a price for later delivery

Forward Price = Futures Price + Basis Ex: Futures Contract = $3.10 Basis = -20 cents Forward Price = $3.10-.20 = $2.90

What are Put Options?

The Right to sell futures contracts at specific prices.

Strike Prices offered in 10 cent intervals for corn Want to buy a Put Option for $3.10 corn Basis = -.20 Premium = .12 Price Floor = Strike Price + Basis - Premium Price Floor = $3.10 - .20 - .12 = $2.78

What are Put Options?

What if price goes up? Futures = $3.50 Cash = $3.30 Net Price = Cash Price + Option Value - Premium Net Price = $3.30 + 0 - .12 = $3.18 What has the Put Option accomplished?

What are Put Options?

What if the price goes down? Futures = $2.50 Cash = $2.70 Net Price = Cash Price + Option Value - Premium Net Price = $2.70 + .40 - .12 = $2.78 What has the Put Option accomplished?