CHAPTER 3

PRICE AND
MARKETING
COST
Chapter 3: PRICE AND MARKETING COST

 3.1 Analysis of price and Exchange Function

 3.2 Competition in the food market
 3.3 The price of farm and food prices
 3.4 The Cost Of Food Marketing

 Text book: Page 133 to 207

3.1 Analysis of price and Exchange Function

 Role of price in the competitive market

1. price guide and regulate food producers’ output and selling decision
2. price guide and regulate consumption decision
3. price guide and regulate marketing decision over time, form and space

 Relative price and food marketing decision - price signal and profit motive –
tools to choose alternatives of market choices. Price types:
1. Absolute price
2. Relative Price (substitution and complementary)
Analysis of price and Exchange Function
 Price determination = Demand (DD) and Supply (SS) Equilibrium
 Exchange Function = Demand and Supply Analysis
 How price and exchange function effect farmer’s income
1.Farmers Income (Total Revenue = price x quantity)
2.TR varies depends on % change in Price and Quantity which measure by the
elasticity of DD and SS.
3.Elasticity of Demand = %change in Qd / %change in P (Ed , TR )
4.Elasticity of Supply = %change in Qs / %change in P (Es , TR )
5.Ilustrate using diagram (DD, SS, Ed and Es)
6. Calculate Ed, Es and TR.
 PRICE ANALYSIS OF FOOD
o Meaning : Costs the buyer to acquire it from the seller; the same price is what the
seller rewards for giving up its property rights on the good or service.
o In a market economy, a change in market forces (supply and demand) changes the
market price. Increase in price of a good in the market offers producers an incentive
to produce more.
o Higher prices of food raise farm income which enables farmers to buy other items
and farm inputs. This means that prices play an important role in efficiently
distributing resources and signaling shortages and surpluses which help farmers to
respond to changing market conditions.
o Prices are important to market participants, a decisive factor in agent decisions,
since they simplify evaluation of complex transactions, and hence contribute to
greater efficiency in their maximization of utility
o Prices allow producers to make a profit per unit produced/sold. They allow
consumers to decide if they wish to spend more than a certain amount for a specific
good or service.
o Three important role of price in market economy:
- Equilibrating process
- Rationing and allocative role of prices
- Limitations of the price mechanism – Market failures
o Equilibrating process – equilibrium price is point at which the quantity of goods that buyers are
willing and able to buy exactly balances the quantity that sellers are willing and able to sell.
o Rationing and allocative role of prices - The rationing (distributive) role of prices in a free market
economy is concerned with the for whom question. For whom are the goods and services
produced? It is concerned with the distribution of a given amount of goods or services among
competing users. Why do we ration?
o Limitations of the price mechanism – Market failures refers to those situations in which the
conditions necessary to achieve the efficient market solution fail to exist or contravened in one
way or another
o Part of the market failures : Market imperfections , public goods, externalities, incomplete
market, Information asymmetry, Inflation, unemployment and economic instability, Inequality and
. Wastage on advertise
3.2 Competition in the food market
PERFECTLY COMPETITIVE MARKET

CHARACTERISTICS :
❖ large number of seller and buyers, - large number of sellers selling the commodity to a large number of
buyers.
❖ homogenous product, - all the sellers sell the same type of product to buyers.(perfect substitution.)
❖ free entry and exit, - no barrier to any new firm or producer to enter the market.
❖ perfect knowledge, - Consumers have all the information about prices and products. While the
sellers have perfect knowledge about their competitors.
❖ profit maximization, - Every firm wants to earn maximum profit.
BENEFITS :
➢ Lower price to consumers.
❑ Consumers can switch their demand to the most competitively priced products in the
marketplace which forces the price of the product to go down.
❑ P=MC, the consumer can pay a minimum price for a product.
➢ Abnormal profit in short run but normal profit in the long run.
❑ In the short run there is a lack of firms in the industry as it is still new and firms have little
incentive to enter it yet. This low supply of firms in the market means the market ruling price will
be greater than the firms' average total costs, creating abnormal profit
❑ but in the long run, this abnormal profit will signal an incentive to other firms
to enter the market as there are no barriers to entry. This will increase the
supply of firms creating a new market ruling price at the trough of each firm's
average total cost curve so that no abnormal profit can be made.
❑ Figure one, the output and price in the short-run → figure two, the output
and price in the long-run
EXCHANGE FUNCTION
→ Mainly composed of buying and selling
→ Activity involve in transferring a raw material to a final goods. They represent the point at which the study of
price determination enters into the study of marketing. The main objective of exchange functions are buying
and selling. Both buying and selling functions have their primary objective as the negotiation of favourable
terms of exchange.
→ Buying function is concerned with seeking out the sources of supply, assembling of products, and activities
associated with purchase. It can be either the assembling the raw products from the production areas or the
assembling of finished products into the hands of other middlemen in order to meet the demands of the ultimate
consumer.
→ Selling function : It is more than merely passively accepting the price offered. It consists of various activities
that are sometimes called merchandizing, physical arrangements of display of goods, advertising and other
promotional devices to influence or create demand. It may also include the decision on the
proper unit of sale, proper packages, best marketing channel and proper time and place to approach
potential buyers.
 If X causes changes in Y, the
elasticity of Y with respect to X
measure how much Y changes
when X changes in percentage
terms. Elasticities of Supply And
Demand

When the Supply Curve in

the Short-Run, Supply
curve will inelastic and
vice versa and it will be
the same as the Demand Measure the sensitivity between two
Curve in the Long-Run, the variables: X and Y.
Demand Curve will elastic
and vice versa.
 Income Elasticity
between good x and Cross-Price Elasticity
income between two goods
Ex,income = Ey,x= %∆𝑄𝑦
%∆𝑄x %∆𝑃𝑥
%∆𝐼𝑛𝑐𝑜𝑚𝑒

Formula of
Elasticities of Supply
and Demand

Elasticity of Supply
Elasticity of Demand
Es = %∆Q
Ed = %∆Q
%∆𝑃
%∆𝑃
Imperfect competition
Monopoly :
A market with many buyers but one seller of a good with no
close substitutes.
 COMPETITION IN THE FOOD MARKET
 Market/Clearing Prices. A market, or clearing price is set when the market
matches supply and demand. If the price is too low, more quantity will be
demanded than what is supplied, and the price will rise. If the price is too high,
there will be a surplus and the price will decline. This clearing price allocates the
product to those who value it the most (though not necessarily to those who
“deserve” it).

 Consumer Response to Price. Both manufacturers and retailers make decisions

as to optimal prices to charge consumers. Ultimate price decisions in the
United States are, of course, made by the retailer, but manufacturers make
promotional and other decisions that influence retailer decisions.
Competition and price shocks and volatility

o What impact does the lack of competition have?

o Welfare impacts
o Competition and the effectiveness of government policies
3.3 The price of farm and food prices
 Farm price are more variable then non-food price
 Change in price will change farmers income
 Food policy decrease food price, decrease farm price
 Decreasing farm price will lowered farmers income
 Farmers will loss and exit the market
 Or, for next plantation they will substitute to another crops that relatively high
price (price signal) and high demand for the betterment of his income (profit
motive)
 In other to raise his profit, farmers need to investigate his marketing cost as:
 Profit = Total Revenue (TR) – Total Cost (TC)
 From this information, farmers will set their profit margin.
FARM INCOME AND PRICE
 Net farm income is influence by THREE factor as
follows:
1. Volume of production
2. Price of farm product
3. Farm cost of producing and marketing product

A change in farm prices affect the quantity of farm

product, just as the price farm product influence
the cost of farm product.
3.4 The Cost Of Food Marketing
 The farmer’s share:- the difference between the retail
price of food and the marketing margin
 The marketing cost index:-provides one measure of food
marketing costs
 The food marketing bill:- the difference between total
consumer expenditures for all domestically produced food
products
 Farm-retail price spreads:- the marketing bill provides an
aggregate view of the division of consumer food
expenditures between farmers and food marketing
 The Food Marketing Margin
 The portion of the consumer’s food ringgit that goes to food marketing firms is referred to as
the marketing margin.
 This is difference between what the consumer pays for food and what the farmer receives.
 In a sense, the marketing margin is the price of all utility adding activities and function
performed by food marketing firms.
 This price includes the expenses of performing marketing functions and also the food
marketing firms’ profits.
 The division of the consumer’s ringgit is determined by competition and bargaining between
these two sectors of food industries.
 In effect, consumer face two prices for food: the farm price and the marketing “price” or
margin
 Small margin denotes greater marketing efficiency, and larger
marketing margin reflects too many middleman and that the margin
could be reduced by eliminating the middleman.
 Larger marketing margin causes low farm price and that an increase in
the margin must necessarily lower than farmer’s price.
 Size of the food marketing margin is sometimes taken as measure of the
profits to be gained by farmers and consumers as a result of performing
additional marketing functions.
 There is no guarantee that farmers or consumers will perform marketing
functions as efficiently as middleman and thus capture food marketing
profits.
 THE FOOD MARKETING BILL
• The food marketing bill is the difference between total consumer
expenditures for all domestically produced food products and what
farmers received for equivalent farm product.
• Calculate manually and serves a one measure of the food marketing
• Three factors are responsible for rising food marketing bill.
1. Result of population growth- the physical quantity of food that is
marketed has increase, raising the total expense of marketing
food.
2. The cost of food marketing inputs-labor and energy have added
to cost of marketing food
3. Consumers desire for additional food marketing services-
convenience foods have further increased the food marketing
bill.
COST COMPONENTS OF THE MARKETING BILL
 LABOR COST
➢ Labor cost account for 45% of the food marketing bill. These include
wages, salaries, employee health, welfare benefits an so on.
➢ The predominance of labor costs in the food marketing bills has three
important consequences.
➢ The marketing bill closely follows the rate of increase in labor costs
➢ Rising labor cost have given food marketing firms a powerful incentive
to increase operational efficiency through substitution of machinery for
labor.
➢ The dominance of labor cost in the food marketing introduce a
downward rigidity in the marketing margin.
 PROFITS IN FOOD MARKETING
➢ There are several conceptions of ‘profit’
➢ Accountant: profit is what is ‘left over’ after all expenses are paid.
➢ Businessman: profit are reward for efficient behavior, and profit seeking is a vital force which
encourages lower costs and improved products.
➢ Economist: profits as another ‘cost’ of doing business.
➢ Business profit increase over time because of these factors:
– Differentiated products
– Diversified companies
– Plant operation efficiencies
➢ Net Profits as a % of Sales (profit ratio)
-Net profit as a per cent of sales are calculated by dividing dollar net profits by total sales.
– Show the share of consumer’s dollar going for profit
– Makes food industry profits seem lower
➢ Return on Investment
– Compares returns to invested dollars
– Makes food industry profits seem higher
 Farm-Retail Price Spreads
• Another measure of the marketing margin → it is the gross
return per retail unit to the food marketing system for
activities and functions.
• Not simply the difference between farm and retail food price
→ the difference between he retail price per unit and the
value of an equivalent amount of food sold by farmers.
• Also can be helpful in understanding the breakdown of the
consumer’s food dollar among market level.
 The Farmer’s Share
• The difference between the retail price of food and the marketing
margin is referred to as the farmer’s share.
• This is the portion of the consumer’s food dollar which famers
receive, expressed as a percentage of the consumer’s food dollar.
The meaning of the farmer’s share
→Cuation is adviced in interpreting and evaluating the size of the
food marketing margin and changes in the farmer’s share.
→A large marketing margin or a declining farm share are not
necessarily indicative of the level of farm prices, farm income,
marketing afficiency or profits, or the value of food to consumers.
 EFFECT OF MARKETING COST

Continued large marketing margin.

 Cost inflation and consumer demand for marketing services are the key
rate of future increases in the marketing margin.
 Marketing costs are influenced by labor, transportation, packaging,
energy costs and other general economics force outside of the food
economy.
 These rising costs will maintain their pressures on the rising food
marketing bill, and government regulations, affecting such areas as
occupational safety, plant sanitation, energy sources and uses, and
environmental protection, also will add costs.
 Opportunities for Reducing Costs
 The rising cost of labor was chiefly responsible for the growth in the
farm-retail spread.
 To reducing labor costs is through improved productivity resulting from
the substitution of machinery for labor.
 Reduce other food marketing costs (labor, transportation, packaging,
energy costs) in order to improve operational efficiency often reduce
consumer satisfaction, pricing efficiency or consumer freedom of choice
.
 The goal of ‘lowering food marketing costs’ must be always reconciled
with the consumer’s freedom of choice, the firms’s freedom of
behaviour, pricing efficiency, and consumer satisfaction.