Lecture 2: Economics of Marketing Flashcards Preview

AGEC2102: Agribusiness Marketing > Lecture 2: Economics of Marketing > Flashcards

Flashcards in Lecture 2: Economics of Marketing Deck (36):
1

Three I's of economic theory

1. Incentives - people respond to incentives to make them better off
2. Interactions - between people can change incentives
3. Indifference - people respond to incentives to the point of indifference to current state and other possibilities

2

Three major jobs of prices in the market

1. Guide and regulate food producer's output and selling decisions
2. Guide and regulate consumption decisions
3. Guide and regulate marketing decisions over time, form and space

3

Relative prices and opportunity cost

- Relative prices NOT absolute prices, are signals for changing market choices
- OC: value of the next best alternative forgone
- makes sense to assess decision making from relative prices standpoint

4

Full price is a combination of...

Transaction price + transaction cost

5

Transaction costs

The expenses of trading with others above and beyond the transaction price

6

Law of one price

- Occurs when transaction costs = zero
- Transaction price of identical goods should be the same across markets

7

Force of one price

- Occurs when transaction costs > 0
- Price difference of identical goods in the two markets must not exceed the transaction costs of buying the good in one market and selling in another

8

Arbitrage opportunities

- Any deviation from law of one price or force of one price
- The act of profiting from price differentials across markets

9

Demand

Schedule of different quantities of a product that buyers will purchase at different prices at a given time and place

10

Law of demand

Infers negative relationship between quantities purchased and prices paid

- The lower (higher) the price, the more (less) of the same product will be purchased

11

Diminishing marginal utility

- As a buyer consumes increasing quantities of a product in a given period of time, the usefulness and desirability of each additional unit of the same product decreases
- Marketers can take advantage of this by pricing products such that you pay less for the additional unit, thus increasing sales e.g. second one half price

12

Market demand schedule

Horizontal sum of individual demand schedules

13

Derived demand

- Demand for agricultural products at the farm gate

14

Marketing margin

- Difference between derived demand for farm products and consumer demand for food products

15

Budget constraint

The combinations of goods and services that a consumer may purchase given current prices within his or her given income

16

Income and substitution effects

- Overall price lower --> consumers have more effective income
- Relative prices change --> consume more of cheaper alternative

17

How to marketers try to take advantage of income and substitution effects?

- Alter consumer preferences so that with the same income, they desire more of the marketed product
- Alter consumer's effective income so they increase consumption of marketed product (e.g. sales, coupons)

18

Quantity demanded vs demand

- A change in quantity demanded refers to movement along the demand curve
- A change in demand corresponds to a shift in the demand curve

19

Factors that can shift the demand curve

- Price of related commodities (substitutes & compliments)
- Income
- Population growth
- Food scares

20

The law of supply

Establishes a positive relationship between quantities offered and prices received

- The higher (lower) the price, the more (less) of the same product will be supplied

21

Supply

Schedule of different quantities that will be offered for sale at different prices at a given place and time

22

Total cost

FC + VC

23

AFC

FC / Q

24

AVC

VC / Q

25

ATC

FC + VC / Q = TC / Q

26

MC

change in TC / change in Q`

27

Supply curve

- Short run: MC curve above AVC
- Long run: MC curve above TC

28

Market supply schedule

Horizontal sum of individual supply schedules

29

Quantity supplied vs supply

- A change in quantity supplied refers to movement along the supply curve
- A change in supply corresponds to a shift in the supply curve

30

Factors affecting supply

- Price of related commodities (substitutes)
- Price of inputs
- Technology
- Weather

31

Equilibrium price

- The point where market supply and market demand curves intersect
- A compromise btw consumers desire for a lower price and producers desire for a higher price

32

If price rises above the equilibrium level...

Becomes a buyer's market - more is supplied than demanded --> price cutting will occur

33

If price falls below the equilibrium level...

Becomes a sellers' market - more is demanded than is supplied, and buyers will bid up the price to the equilibrium level

34

Welfare - consumer surplus

Difference between consumers' willingness to pay and the market price of the product

35

Welfare - producer surplus

Difference between producers' willingness to accept and the market price of the product

36

Welfare - Total surplus

Sum of the consumer surplus and the producer surplus