The Agricultural Marketing System >Fish cage - a stationary or floating fish enclosure

of synthetic net wire/bamboo screen

Subsectors of Agriculture in the Ph >Oyster farm - an aquafarm involved in the
Agriculture - is the systematic raising of useful cultivation of oyster/mussel
plants and livestock under the management of man >Seaweed farm - an aquafarm involved in the
1. Crop cultivation of seaweed in suitable water areas
a. Palay and corn/maize
b. Agroforestry
b. Industrial – rubber, abaca, oil palm
c. Major - coconut, sugarcane, banana, Agricultural Marketing
d. Minor – 40% of total prod.
e. Non-food – ornamental plants and cutflower Market - a group of buyers and sellers with facilities
f. Permanent – fruit trees, shrubs for trading with each other.
g. Priority - cashew, durian, highland Marketing - series of services involved in moving a
h. Root – Carrots, Radish product from the point of production to the point
i. Temporary of consumption
j. Vegetable crops Service - function performed on or for a product
that alters its form
2. Livestock - beef cattle, carabao, swine, Production services - functions performed before
goat, and dairy animals the point of production
Post- production services - after harvest and before
Commercial farms - any farm which satisfies at the point of first sale by the farmer.
least 21 head of adults and 0 young animals or at Point of production - the point of first sale by the
least 41 head of young animals; or at least ten (10) farmer
head of adults and 22 young Marketing services - after the point of production
Farmgate price - The price received by farmers at
Backyard farms - any farm that does not qualify as
this point
a commercial farm
Point of consumption - point of last purchase by the
Dairy farms - where dairy animals are raised for end consumer.
milk production
3. Poultry
a. Chicken Approaches to the study of AgMar
b. Duck
I. Commodity approach
a. Commercial farm - consumer behavior towards the good or service
- refers to any farm which satisfies at least
one of the following conditions: at least 500 II. Institutional approach
layers or 1,000 broilers; at least 100 layers - individuals and groups which are directly or
and 100 broilers if raised in combination; or indirectly involved in the marketing
at least 100 head duck regardless of age
b. Backyard farm Middlemen
- any farm that does not qualify as a - involved in the purchase and sale of goods as
commercial farm transferred from producers to final end-users.
4. Fisheries
A. Merchant
a. Commercial fishing - perform buying and selling of products.
- use of fishing boats 1. Contract-buyers/contractors
a. Municipal fishing - They provide material inputs to farmers
- using fishing vessels 2. Grain millers
b. Aquaculture - provide cash advances, sacks, and
>Aquafarm - the farming facility used in the storage facilities to farmers for the latter to
culture or propagation of aquatic species engage in contract arrangements
>Fishpond - a land-based type of aquafarm 3. Wholesalers
>Fish pen - an artificial enclosure
- procure from millers or farmers and then
constructed within a body of water
 sell to retailers, other wholesalers, and
institutional buyers.
(a) Viajeros - transport goods from production
areas to demand centers
(b) Financial-wholesalers - provide credit to farmers
and other middlemen
(c) Shippers - transport goods by plane or ship
4. Retailers
- buy from wholesalers and wholesaler-
retailers within the area (e.g. supermarkets,
sari-sari stores)
B. Agent
- negotiate between sellers and buyers of a product
C. Processors
- alter the form of a product into a processed or
manufactured good.
D. Facilitative organizations
- promote a conducive environment for the market
participants
1. Auction market – place where buyers and
sellers meet and bid
2. Government bureaus and agencies
E. Market/Trade Associations
III. Function approach
Kohls and Uhl (1990) classifies marketing functions
into three:
1. Exchange functions- involve transfer of
ownership
(a) buying
– from producers to consumers; sourcing,
assembling and purchasing of goods
(b) selling
- considers the form, place, time and possession
characteristics of goods to be sold which are
preferred by consumers
(a) standardization
- establishes and maintains uniform measurements
of produce quality and/or quantity
(b) financing
- determining investment and capital requirements
and sourcing out and utilizing funds to meet the
requirements
(e) demand creation
- promotes product awareness through
advertisement and promotions
IV. Market structure, Conduct, and Performance
approach
(1) Market structure influences market conduct;
(2) Market conduct affects market performance;
and
(3) Market performance is determined by market
structure
1. Market Structure
- refers to how market is organized
2. Market Conduct
- refers to how market participants behave in the
market in which they are engaged as buyers or
sellers
3. Market Performance
- appraisal of how much the economic resource of
the industry’s market behavior or conduct

2. Physical Functions
(a) processing – alters the form of a product
(b) packaging – determines the outer appearance
of a product
(c) storage – makes the product available in a
certain future time
(d) transportation – makes the product available
in a specific place

3. Facilitating Functions
- enable the exchange process to take place
 d. Facilitative organizations – provide conducive
Subsystems of the Agricultural Marketing environment for marketing
System e. Market/trade associations – influence the nature
of marketing
1. Producer subsystem
a. Individual farmers/fishermen/producers 5. Consumer
b. Corporate farms a. Institutional buyers – e.g., hotels, restaurants
c. Cooperatives and hospitals
d. Clusters b. Household consumers – final-end users

2. Flow Arc Elasticity of Demand

a. Products/services Q2 – Q1 / (Q2 + Q1)/2
b. Financial products/services and information P2 – P1 / (P2 + P1)/2
c. Market information Cross Elasticity of Demand

3. Functional
a. Exchange functions – buying and selling
b. Physical functions – processing, packaging,
storage and transportation
c. Facilitating functions – standardization, financing,
risk-bearing, market intelligence, and demand
creation

4. Market Channel

a. Merchant middlemen – perform buying and

selling
b. Agent middlemen – negotiate between buyers
and sellers
c. Processors and manufacturers – perform
processing
 6. Environmental Utility –Benefit, usefulness or happiness derived
by consuming a product
a. Economic factors – e.g., foreign exchange rate, Marginal Utility – change in the utility from an
inflation increase in consumption of a good or service
b. Technological factors – e.g., high yielding Indifference Curve – graph which shows a set of
varieties, superior breed, improved cultural possible consumption bundles (i.e., combinations of
management practices two goods) which give a consumer equal or same
c. Physical factors – e.g., soil pH, soil texture, soil utility (i.e., consumer is indifferent to these different
nutrient content combinations)
d. Climatic factors – e.g. El Niño, La Niña Indifference Map – shows combination of
e. Socio-cultural factors – e.g., culture, tradition, indifference curves
events Properties of Indifference Curves
f. Legal factors – e.g., taxation, labor code, 1. Downward-sloping
environmental compliance 2. Higher indifference curves are preferred to lower
g. Political factors – e.g., elections, priority of ones
current administration 3. Indifference curves cannot intersect
4. Indifference curves are convex (i.e., a surface
Point Elasticity of Demand that curves outward)
Δ Q/Q / Δ P/P Law of Diminishing Marginal Utility –a given
increase of his stock of a thing diminishes with
Demand for Agricultural Inputs, Products and every increase in the stock that he already has”
Services Equimarginal Principle – optimal combination of
goods where consumers maximize their utility
Review from ECON 11
Budget Line – graph which shows combination of
two goods that a consumer can afford to buy at
current market prices with a given income
Properties of Budget Line
1. Downward-sloping
2. Straight line
3. Real income line
4. Tangent to indifference curve
Assumptions of Marginal Utility Theory
1. Consumers are rational.
However, consumers are not always rational (e.g.,
over consumption of goods with low marginal
benefit, purchases made due to impulse or
advertising campaigns).
2. Utility can be described in cardinal terms (e.g.,
monetary units).
However, consumers only have a rough idea of the
utility a good can provide and in practical terms,
they cannot give a cardinal value to utility. They
also do not have time to work out the equimarginal
principle before purchase.
3. Constant prices and incomes.
However, market prices and consumers’ income
vary.
4. Goods can be split up into small units.
However, some goods cannot be split into small
units (e.g., live hogs, farm tractor)
Types of Utility
1. Form utility: want satisfaction generated by the
physical characteristics of the goods
• Raw/fresh, semi-processed or processed form
(e.g., whole coconut – husked coconut – coconut
oil)
• Packed/packaged or unpacked/unpackaged (e.g.,
vegetables, fruits, meat)
• Physical characteristics (e.g. styles of pineapple –
whole, slices or rings, spears or fingers, tidbits,
chunks, diced or cubes, pieces, chips, crushed or
crisp cut)
2. Place utility: want satisfaction associated with
having the goods and services available where
consumers will buy them
• Bagsakan Center, Trading Post
• Wet/Flea Market, Public Market, Farmer’s Market,
Wholesale Market, Supermarket, Hypermarket
• Local/Domestic Market and International Market
• Delivery
• E-commerce
3. Time utility: want satisfaction associated with
having the goods and services available when
consumers will buy them
• Availability: 24 hours vs regular hours
• Convenience: Fast check-out lanes, drive-through
windows, vending machines
• Weather or Climate
• Holidays or Events
4. Possession utility: want satisfaction acquired
through ownership, usage and consumption of
goods and services
• Live pigs (hog raisers to viajeros)
• Slaughtered pigs (packers/shippers to
wholesalers)
• Pork carcasses (retailers to end consumers)
5. Image utility: products and goods have attached
emotional or psychological meaning on them which
consumers want to experience
• • Personality (compulsive, filial, outgoing,
authoritarian, ambitious)
• • Lifestyle (achiever, striver, survivor)
• • Benefits (quality, service, economy,
convenience, speed)
• • Attitude (enthusiastic, positive, indifferent,
negative, hostile)
Law of Demand
- states that the quantity demanded for a good (or
service) is inversely related to its own price
A decrease in the price of a good causes (1) an
increase in the consumption of the cheaper good
over the relatively more expensive good and (2) an
increase in real income (i.e., buy the same amount
of the good for less money and thus have money
left for additional purchases).
Substitution Effect
- if price of a good (or service) increases, the
consumer shifts their purchase in favor of the
relatively cheaper good (or service)
- utility remains constant but the price changes
Income Effect
- if price of a good (or service) increases, the real
income or purchasing power of a consumer
decreases, thus a consumer buys less of the good
(or service)
- price remains constant but the utility changes
- i.e., with fixed money income, changes in price
have the same effect as a change in real income
Total Effect
- sum of substitution effect and income effect
Graph:
1. Draw x-axis for Good X and y-axis for Good Y.
2. Draw an indifference curve.
3. Draw a budget line tangent to the indifference
curve.
 . Draw a new budget line and then a new Giffen Good
indifference curve. - a type of good whose quantity demanded
5. Draw a parallel budget line to the new budget changes in the same direction as the price change
line. - violates the Law of Demand
Demand - e.g., inferior quality staple food
- different quantities of a good (or service) that
consumers will buy at alternative prices, holding Market Demand
other factors affecting demand constant - quantities of a good (or service) which all
3. Real income line consumers in a given market are willing and able to
4. Tangent to indifference curve purchase as price varies, ceteris paribus
Nobli PuREGOLD - a relationship between quantity
demanded and price change in price >>> change in quantity demanded
Quantity Demanded by a single buyer >>> change in quantity
- specific amount demanded associated with a demanded by the market
specific price
Ceteris Paribus [Latin] Change in Demand and Quantity Demanded
– “with other things the same”, “all other things A change in demand is a change in an entire
being equal or held constant” demand schedule, a shift in the demand curve.
Effective Demand
- consists of both willingness and ability to pay for a >A rightward shift >>> increase in demand
good (or service) >A leftward shift >>>decrease in demand.
Examples of Demand
Producers: farm inputs, labor A change in quantity demanded is a change in
Goat raisers: Napier grass, urea molasses mineral quantity brought by change in own price, a
block, dewormer movement along the demand curve.
Household Consumers: fresh mango, tomato, pork,
shrimp, chicken, rice An extension (i.e., downward movement to the
Bakers: salt, confectionary sugar, baking soda right) denotes an increase in quantity demanded
Demand Schedule (and a decrease in price) while a contraction (i.e.,
- tabular representation of demand relation upward movement to the left) denotes a decrease
Price (PhP/kg) Quantity Demanded (kg) in quantity demanded (and an increase in price).
Demand Curve
- graphical or functional representation of demand Factors Affecting Demand for Agricultural
relation Labor
x – axis (1) Demand for goods and services
- quantity demanded (2) Education and training – e.g., well-trained and
y - axis educated workforce
- price (3) Technology – acts as substitute for or
complement to skilled professional workers
Relationships between Indifference Curves, (4) Number of farms and firms
Budget Lines and Demand Curve (5) Government regulations
(6) Price and availability of other agricultural inputs
Price-Consumption Curve
- intermediate graph between the graph of Factors Affecting Demand for Agricultural
consumer choice and the demand curve Products and Services
(1) Population and number of consumers and users
Demand Function (2) Age and sex structure
If the demand schedule has only two coordinates, (3) Degree of urbanization
(Qd2,P2) and (Qd1,P1) (4) Income (high, medium or low; increase or
x = quantity demanded decrease)
y = price (5) Prices of related goods (substitutes or
Inverse Demand Function complements)
If the demand schedule has only two coordinates, (6) Consumers’ tastes and preferences
(Qd2,P2) and (Qd1,P1) (7) Environmental factors (e.g., weather, climate)
x = price (8) Socio-cultural factors (e.g., religion, ethnicity)
y = quantity demanded (9) Policy factors (e.g., VAT, sin tax)
(10) Consumer’s expectation of future prices (high
or low)
Elasticity
- ratio of percentage change in y and percentage
change in x
Price Elasticity of Demand
- percentage change in the quantity of a product (or
service) that consumers will buy in response to a
given percentage change in price, ceteris paribus
Ed = % change in quantity demanded/ % change in
price
Vertical Demand Curve
- no change in quantity demanded
Horizontal Demand Curve
- all units of product (or service) are purchased at
one price
Ed = 0 (perfectly inelastic)
-1 < Ed < 0 (inelastic)
Ed = -1 (unitary elastic)
-∞ < Ed < -1 (elastic)
Ed ≈ -∞ (perfectly elastic)
Measurements of Price Elasticity of Demand
the industry’s market behavior or conduct
- elasticity based on the behavior of
revenue/expenditure
- does not give a numerical value of price elasticity
of demand
(2) Point Elasticity
- elasticity at a point on the demand curve
- degree of elasticity changes as one moves along
the demand curve
- condition: prices remain relatively constant over
long periods of time
where: E = price elasticity of demand
Δ Q/Q = relative change in quantity demanded
Δ P/P = relative change in price
(3) Arc Elasticity
- elasticity at the larger segment of the demand
curve
- condition: price changes by a large amount
A one percent increase in the price of Good X
would decrease quantity demanded by one
percent, ceteris paribus. Since the percentage
decrease in quantity demanded is equal to the
percentage increase in price, Good X is unitary
elastic.
Types of Elasticity of Demand
Income Elasticity of Demand
- responsiveness of expenditure/quantity
demanded for a good (or service) to a change in
income, ceteris paribus
(a) Income-expenditure elasticity
IEE = 0 (sticky good)
IEE>0 (necessity)
IEE > 1 (luxury, superior good)
IEE < 0 (inferior good)
(b) Income-quantity elasticity
Both inferior and luxury/superior goods are
classified as normal goods.
Cross Elasticity of Demand
- responsiveness of quantity demanded for a good
(or service) to a change in price of another good,
ceteris paribus
CED = 0 (independent goods)
CED > 0 (substitutes)
CED < 0 (complements)
The cross price elasticity of good A with respect to
the price of good B.
Household/Family Size Elasticity
- responsiveness of quantity
demanded/expenditure for a good (or service) to a
change in household or family size
Price Flexibility
- responsiveness of P to changes in Qd
F = Δ P/P / Δ Q/Q
where: F = price flexibility
Δ Q/Q = relative change in quantity demanded
Δ P/P = relative change in price
Interpret the following elasticity of demand. Classify
each good based on their elasticity.
Income Elasticity of Demand
Cross Elasticity of Demand
(1) Own price elasticity of demand for chicken
Ec = ΔQc/ΔPc X (Pc/Qc)
= -0.035 X (130/2.5)
Ec = -1.82
This means that a 1% increase in the price of
chicken would decrease quantity demanded for
chicken by 1.82%, holding other factors constant.
The demand is price elastic.
(2) Cross elasticity of chicken with respect to the
price of rice
Ec,r = ΔQc/ΔPr X (Pr/Qc)
= -0.098 X (18/2.5)
= -0.7056 or -0.71 (complementary goods since
Ec,r < 0)
This suggests that a 1% increase in the price of rice
would decrease quantity demanded for chicken by
0.71%, holding other factors constant.
(3) Cross elasticity of chicken with respect to the
price of fish
Ec,r = ΔQc/ΔPf X (Pf/Qc)
= 0.063 X (90/2.5)
= 2.268 (substitutes since Ec,f > 0)
This denotes that a 1% increase in the price of fish
would increase quantity demanded for chicken by
2.268%, holding other factors constant.
(4) Income-quantity elasticity of demand for chicken
IQE = ΔQc/ΔY X (Y/Qc)
= 0.002 X (2,000/2.5)
= 1.60 (normal good, luxury or superior good since
IQE > 0)
This means that a 1% increase in income would
result to a 1.60% increase in quantity demanded for
chicken, holding other factors constant. The
demand is income elastic.
(5) Household or family size elasticity of demand
for chicken
HSE = ΔQc/ΔHs X (Hs/Qc)
= 0.137 X (5/2.5)
= 0.274
This suggests that a 1% increase in the household
or family size would result to a 0.274% increase in
quantity demanded for chicken, holding other
factors constant. The demand is household or
family size inelastic.
(6) Price flexibility
F = 1/Ec = 1/-1.82 = -0.55 [approximation]
This denotes that a 1% increase in the quantity
demanded for chicken would result to a 0.55%
decrease in the price of chicken, holding other
factors constant. Since /F/ < 1 (i.e., /-0.55/ < 1 or
0.55 < 1), it is price inflexible.
Computing Elasticity Given Double Logarithmic
Form of the Demand Curve
ln QR = 0.15 - 0.04 ln PR - 0.10 ln PC + 0.01 ln Y +
e inelastic demand: few alternative uses
QR = quantity demanded of rice (kg)
PR = price of rice per kilogram (Php/kg)
PC = price of chicken per kilogram (PhP/kg)
Y = income (Php)
(1) Own price elasticity of demand for rice
ER = -0.04
This means that a 1% increase in the price of rice
would decrease quantity demanded for rice by
0.04%, holding other factors constant. The demand
is price inelastic.
(2) Cross elasticity of rice with respect to the price
of chicken
ER,C = -0.10 (complementary goods since ER,C<
0)
This suggests that a 1% increase in the price of
chicken would decrease quantity demanded for rice
by 0.10%, holding other factors constant.
(3) Income-quantity elasticity of demand for rice
IQE = 0.01 (normal good, necessity since 0 > IQE >
1)
This means that a 1% increase in income would
result to a 0.01% increase in quantity demanded for
rice, holding other factors constant. The demand is
income inelastic.
(4) Price flexibility
F = 1/ER = 1/-0.04 = -25 [approximation]
This denotes that a 1% increase in the quantity
demanded for rice would result to a 25% decrease
in the price of rice, holding other factors constant.
Since /F/ > 1 (i.e., /-25/ > 1 or 25 > 1), it is price
flexible.
Factors Affecting Elasticity of Demand
(1) Given demand curve
(a) Own price
- price elasticity is directly proportional to price
- few consumers can afford to pay high prices for a
product
- more consumers can afford to buy a product at
low prices
(2) Different demand curves
- characteristics of products, consumers, and
marketing system
(2.1) Characteristics of the Product
(a) Availability of effective substitutes
- higher price change: more substitutes;
lower price change: less substitutes
- perfectly elastic demand: (infinite) many
substitutes;
perfectly inelastic demand: no substitute
(b) Uses of commodity
- elastic demand: many alternative uses;
(c) Time of release in the market
- elastic demand: new product/service;
inelastic demand: old product/service
(d) Quality ❖ Some changes in the supply of agricultural
- elastic demand: high quality; goods are unpredictable and are brought by a
inelastic demand: low quality number of biological and environmental factors that
(e) Necessary to life are outside the control of farmers.
- elastic demand: less significant;
inelastic demand: more significant ❖ Unstable supply of agricultural goods also
(f) Perishability causes net income or profit of farmers to become
- elastic demand: more perishable; unstable affecting production-related decisions by
inelastic demand: less perishable the farmers.
(2.2) Characteristics of the Consumer
(a) Income
- elastic demand: poor;
inelastic demand: rich
(b) Age
- elastic demand: young;
inelastic demand: old
(2.3) Characteristics of the Marketing System
- elastic demand: processed, stored, packaged or
transported good
inelastic demand: from retailers to farmers

Importance of the Concept of Demand Elasticity

1. Determine changes in revenue from a product
through changes in purchases based on the price
elasticity of demand
2. Determine which income group of consumers will
respond most to changes in income based on the
income elasticity of demand
3. Determine which good has elastic demand
where marketing services can be employed to gain
some benefits
4. Determine the level of government interventions
based on different demand elasticities
❖ As shown in Figure 1, the (red and yellow –
ordinary line) inelastic supply and demand curves
showed a large fluctuation in farmgate prices.
II. Stickiness of Retail Prices
❖ The supply and demand curves for agricultural
goods at the retail level tend to be elastic. This is
because retailers can easily adjust the supply of
goods they will sell while in terms of demand,
marketing services have been done on or for the
goods before they reach the retail market.
❖ As shown in Figure 1, the (red and yellow –
broken line) elastic supply and demand curves
showed a small fluctuation in retail prices.

Supply and Demand Applications in III. Effects of a Decrease in Supply to Total

Agriculture
I. Volatility of Farmgate Prices
❖ The supply of and demand for agricultural goods
at the farm level tend to be inelastic. This is
because of the time dimension in supply (i.e., very
short run and short run periods) and for demand, it
is due to no/less post-harvest and/or marketing
services done on or for the goods at the farm level.
❖ If demand is inelastic, increase P >> increase
total revenue, and consequently net income or
profit. Decrease P >> Increase total revenue and
net income or profit.
Revenue
❖ Since the demand for agricultural goods is
inelastic, farmers have profit incentive to reduce
supply.
Higher prices >> Increase produce
Lower prices >> Decrease produce
❖ If a supply control program is implemented by
the government (e.g., higher tariff or quantitative
restrictions/quota for imported goods) >>farmers
gain while consumers lose from this program.
 ❖ As shown in Figure 2, given an inelastic demand
curve and a shift in the supply curve from S1 to S0
due to any factor that would increase farm supply,
the equilibrium quantity has increased from Q1 to
Q0 while equilibrium price has decreased from P1
to P0. Initially, the total revenue is the rectangular
area 0P1BQ1 but after the increase in supply, total
revenue has decreased to 0P0AQ0. Late adopters
will be penalized through reduced total revenue.

V. Effects of Changes in Export Demand to

Food Prices
❖ In the very short run period, the supply is
perfectly inelastic. The equilibrium quantity and
equilibrium price are at Q0 and P0, respectively.

❖ An increase in export demand shifts the demand

❖ As shown in Figure 2, given an inelastic demand
curve and a shift in the supply curve from S0 to S1
due to any factor that would decrease farm supply,
the equilibrium quantity has decreased from Q0 to
Q1 while equilibrium price has increased from P0 to
P1. Initially, the total revenue is the rectangular
area 0P0AQ0 but after the decrease in supply, total
revenue has increased to 0P1BQ1.
curve to the right, which results to a higher price
(P0 to P’0).
❖ Exporters respond to this higher price by
increasing their supply, rotating the supply curve to
the right. From a perfectly inelastic supply curve,
the supply curve becomes more elastic.

> Higher total revenue = higher net income or profit, ❖ In the long run, prices go down from P’0 to P1
which is beneficial to farmers. while quantity increases from Q0 to Q1.

IV. Effects on an Increase in Supply to Total

Revenue
❖ The supply of agricultural goods is based on
expected farm yields. If yield exceeds normal or
expectation (i.e., larger than expected crop), the
supply curve shifts to the right resulting to lower
farmgate price. A decrease in own price results to a
reduction in total revenue, and consequently net
income or profit. Thus, farmers are penalized for an
unexpected high level of production.

❖ Farmers need production and market information

to be guided in their planting decisions so as not to
increase production to a level that will cause
farmgate prices to fall.

❖ Cost-reducing technologies also result to an Figure 3. Effects of an increase in export demand

increase in supply. This leads to a decrease in own to food prices
price and eventually total revenue. It appears that
farmers should not be adopting such technologies VI. Effects of Price Ceiling and Floor
as the end result is a decrease in total revenue.
❖ Price ceiling is a legally set price below the
However, the early adopters gain the profit
equilibrium price. It aims to address inflation, thus
advantage over the late adopters.
considers the welfare of consumers. If price ceiling
is set too low, black markets, rationing and out-of-
❖ Consumers gain through relatively lower food stock problems persist.
prices in the long-run.
❖ In the case of a price ceiling, quantity demanded
(QDC) exceeds quantity supplied (QSC) (i.e.,
excess demand for goods or services). It is the
triangular area 1, 5 and 4 (Figure 4).
❖ Price floor or support price is a legally imposed
price above the equilibrium price. It aims to support
farm prices and ultimately farm income, thus
considers the welfare of producers.
❖ In the case of a price floor, quantity supplied
(QSF) exceeds quantity demanded (QDF) (i.e.,
excess supply of goods or services). It is the
triangular area 2, 5 and 3 (Figure 4).
Price Analysis
I. Price Determination
❖ Value is the characteristic of a good or service to
attract another product or service, in the case of
barter trade, or money in exchange which is
expressed in quantitative terms.
❖ Price is the amount of money (good or service)
which is required for trading of goods and services
to occur.
❖ Prices guide producers on what and how much
to produce and influence consumers on what and
how much to purchase. The time and place of
selling and buying are also affected by prices.
❖ Agricultural prices are determined over a wider
spectrum of pricing due to the difference in the
market structure of a specific agricultural
commodity.
❖ Agricultural prices are more volatile than non-
agricultural prices due to the following reasons:”
o Biological nature of production and the product
o Existence of time lags (i.e., difference in the time
between the decision to produce and the realization
of final output)
o Nature of demand (i.e., agricultural demand is
relatively more inelastic than agricultural supply;
price changes in supply are greater than in
demand)
> Involvement of more middlemen compared to
goods sold in the industrial sector
> Domestic prices are affected not only by local
production and consumption but also by foreign
supply (i.e., import) and demand (i.e., export)
❖ Price determination refers to the supply and
demand situation arriving at a market clearing price
(i.e., equilibrium price) and equilibrium quantity (i.e.,
quantity of goods or services that producers are
willing and able to produce and quantity of goods or
services that consumers are willing and able to buy
at equilibrium price).
❖ The interaction between the broad forces of
supply and demand determines the level of price in
the market.
❖ Price determination in a perfectly competitive
market assumes the following:
> Sellers produce homogenous product.
> There are very large number of sellers and
buyers such that all are price takers.
takers and the market price is determined solely by
supply and demand in the entire market and not by
a very small individual supplier.
> Sellers and buyers have all relevant information
to make rational decisions about the product.
> In the long-run, there are no barriers to entry and
exit in the market.
❖ Marginal revenue curve shows the additional
revenue gained from selling one more unit of
output.
❖ A firm faces a perfectly elastic demand curve
(D=MR).
❖ The firm’s profit-maxing choice of output will
occur where P=MR=MC.
❖ At P1 and P2, the profit of the perfectly
competitive firm is positive (i.e., profit zone). At P3,
the firm’s profit is equal to zero (i.e., break-even
point). At P4, the firm’s profit is negative but must
continue operation in the short-run since it covers
the variable costs of production. At P5, the firm’s
profit is negative (i.e., shutdown point) and any
price below P5 makes the firm immediately stop its
operation since it is not even covering the variable
costs of production.
Figure 1. Profit-maximizing condition in the
perfectly competitive market
❖ In a perfectly competitive market, the intersection
between the upward-sloping market supply curve
and the downward-sloping market demand curve
determines the equilibrium price and quantity.
❖ Given an increase in supply and no change in
demand, equilibrium price decreases while
equilibrium quantity increases. Given a decrease in
supply and no change in demand, equilibrium price
increases while equilibrium quantity decreases.
❖ Given an increase in demand and no change in
supply, both equilibrium price and equilibrium
quantity increase. Given a decrease in demand and
no change in supply, both equilibrium and
equilibrium quantity decrease.
❖ Given an increase in both supply and demand,
assuming that the magnitude of changes is the
same, equilibrium price remains the same (i.e.,
price stability) while equilibrium quantity increases.
Given a decrease in both supply and demand,
equilibrium price remains the same while
equilibrium quantity decreases.
❖ Given an increase in supply and a decrease in
demand, assuming that the magnitude of changes
is the same, equilibrium quantity remains the same
while equilibrium price decreases. Given a
decrease in supply and an increase in demand,
equilibrium quantity remains the same while
equilibrium price increases.
❖ Price determination in a monopoly market
assumes the following:
o A single seller produces homogenous product.
o The barriers to entry and exit in the market are
absolute.
❖ A monopolist perceives the demand curve that it
faces to be the same as the market demand curve,
which for most goods is downward-sloping.
❖ The monopolist’s demand curve is the same as
the market demand curve since it is the only firm in
the market.
❖ A monopolist can use information on marginal
revenue and marginal cost to seek out the profit-
maximizing combination of quantity and price.
❖ The monopolist chooses the profit-maximizing
level of output Q1, by choosing the quantity where
MR=MC.
❖ The monopolist decides how much to charge for
output level Q1 by drawing a line straight up from
Q1 to point R on its perceived demand curve. Thus,
the monopoly will charge a price P1.
❖ The monopolist identifies its profit. Total revenue
will be Q1 multiplied by P1. Total cost will be Q1
multiplied by the average total cost of producing
Q1, which is shown by point S on the average total
cost curve to be P2. Profits will be the total revenue
rectangle minus the total cost rectangle, shown by
the shaded zone in Figure 2.
Figure 2. Profit-maximizing condition in a monopoly
market (BCcampus Open Education)
❖ The above discussions tackle price
determination using graphical approach.
Equilibrium price and quantity can also be
determined using mathematical approach.
❖ Dependent variables also known as
endogenous variables while independent
variables are also called as exogenous or
explanatory variables or determinants.
❖ In a supply function, the dependent variable is
quantity supplied denoted as qs for individual
supply and Qs for market supply. Whereas, the
independent variables are the factor affecting
quantity supplied (i.e., own price of the product, Po)
and the factors affecting supply such as price of
resource inputs or factor price (Pi), price of closely
related products (Pr), profitability of competing
crops (Pc), price of joint product (Pj), technology
(T), seller’s expectation of future prices (Pe),
environmental factors (E), and institutional and
policy factors (IP).
❖ In a demand function, the dependent variable is
quantity demanded denoted as qd for individual
demand and Qd for market demand. Whereas, the
independent variables are the factor affecting
quantity demanded (i.e., own price of the product,
Po) and the factors affecting demand such as
population or number of buyers (Pop), age
structure (A), sex structure (S), degree of
urbanization (U), income (Y), price of substitutes
(Ps), price of complements (Pc), buyer’s
expectation of future prices (Pe), consumer’s tastes
and preferences (TP), environmental factors (E),
socio-cultural factors (SC), and policy factors (P).
❖ The equilibrium condition is where Qs = Qd. The
supply and demand model to be tackled in this
chapter only considers a static-, equilibrium- and
deterministic-type of model. It means that time is
not considered, outcome is certain and the before
and after outcomes are determined.
❖ Since both Qs and Qd is a function of price (i.e.,
Qs = f(P) and Qd = f(P), the equilibrium price can
be solved by equating Qs = Qd and the equilibrium
quantity can be determined by substituting the
equilibrium price to either the supply or demand
function.
II. Price Behavior Over Time
❖ Price variation or fluctuation refers to the
change in price due to changes in supply and/or
demand (i.e., price determination)
❖ Price discovery process involves the
determination of a transaction price between
buyers and sellers in a specific time and place
considering the quantity and quality of a product.
❖ It can also be defined as the process of buyers
and sellers arriving at a transaction price for a given
quality and quantity of a product at a given time and
place. ❖ Types of Price Variation
(a) Seasonal Price Variation
- a more or less uniform pattern of change within a
year that is observable over a period of years
- attributed to a more or less regular pattern of
changes in supply and demand
Seasonality in Supply and Demand
- supply: climate, perishability, storage, credit and
risk charges
- demand: climate, socio-cultural
factors (e.g., holidays)
(b) Annual Price Variation
- refers to price determination in a perfectly
competitive market
- year-to-year variation in prices is typically greater
for crops as compared to non-crops
- since demand for many crops is inelastic, annual
shifts in the supply curve would result to highly
fluctuating yearly prices
(c) Trends
- associated with general inflation and deflation in
the economy
- supply: technological change
- demand: changes in income, tastes and
preferences
- distributed lag responses may be a factor in
longer term changes in economic variables
Consumer Price Index
- a measure of price change for a given market
basket of goods from one-time period to the next
within the same location
(d) Cyclical Price Variations
- farmgate prices fluctuate in rather regular pattern
- when production increases, prices fall and vice
versa
Cobweb Model
- Cobweb Theorem
- prices and quantities are viewed as linked
recursively in a causal chain
Assumptions:
(a) goods are produced and sold in a competitive
market structure;
(b) lagged supply response;
(c) linearity of supply and demand curves;
(d) unchanged supply and demand conditions;
(e) simple dynamic model
Convergent Cycle
– demand is more elastic than supply; damped
oscillation/stable case
Under convergent cycle, as producers and
consumers continue their transactions, the price
and quantity approach the equilibrium price and
quantity.
Divergent Cycle
– supply is more elastic than demand; explosive
oscillation/unstable case
Under divergent cycle, as producers and
consumers continue their transactions, the price
and quantity move away from the equilibrium price
and quantity.
Constant Amplitude Cycle
– elasticities are the same; perpetual oscillation
case
Under constant aptitude cycle, as producers and
consumers continue their transactions, the price
and quantity go in cycle and do not reach the
equilibrium price and quantity.
(e) Random or Irregular Price Movements
- no exact or systematic pattern of price change
- unpredictable determinants
- supply: inventions, strikes, typhoons, floods,
landslides and forces not recurring at predictable
intervals
Steps in Decomposition (Multiplicative Method)
Price = Seasonality X Trend X Cyclical x Random
(1) 12-month Moving Averages
(2) Ratios (Actual Price/Moving Average)
(3) Average Ratios
(4) Seasonal Index
(5) Seasonally Adjusted Series (Actual
Price/Seasonal Index)
(6) Trend (Model Using Deseasonalized Prices)
(7) Fitted Values (Trend x Seasonal Index)
(8) Random or Irregular Components (Actual Price
– Fitted Value)
III. Operational Aspects of the Pricing Process
Mechanisms of Price Discovery
(Tomek and Robinson, 1977)
(1) Individual Negotiations
- bargaining between individual sellers and buyers
- single seller: monopoly or
single buyer: monopsony
(2) Organized Markets
- centralized and institutionalized exchange and
pricing functions
(a) Commodity Exchanges
- trading site of goods and derivative products with
specified rules
(b) Auction Markets
- goods which are difficult to standardize
- actual inspection for quality assurance
(Dutch/Danish auction)
- price discovery through progressively bidding for
each transaction made through public outcry
(Canadian auction)
- offers start at a price over the anticipated prices;
offering price declines until someone accepts
Dutch/Danish Auction versus Canadian Auction
- a buyer pays the lowest price that he or she is
willing to buy
- a good is sold to a buyer at the maximum price he
or she is willing to pay
- public or private facilities
(c) Terminal Livestock Exchanges
- livestock grower (consigns his or her animals) →
commission agent (at the terminal) → seeks buyers
→ negotiates best possible price → collects
payment → deducts yardage fees and
commissions → refunds the remainder to the
grower
- prices are reported by the exchange and media
(3) Administered Prices
- no central market and impractical and costly
individual negotiations
- commodities with price support
Degree of Price Control by Sellers
monopoly > pure oligopoly > differentiated oligopoly
> monopolistic competition > perfectly competitive
market > monopsony
(4) Formula Pricing
- a formula pricing agreement is negotiated with the
buyer
(5) Collective Bargaining
- formation of bargaining associations for better
market power
- necessary conditions:
bargaining agency must have complete control over
price (i.e., price maker);
buyers are few in number to facilitate bargaining;
and
inelastic demand for the product
IV. Pricing Strategies of Agri-based
Manufacturers and Retailers
(1) Manufacturer’s Pricing Strategies
(a) Skimming the market
- manufacturer: achieve highest possible price in
the short run
- no promising long run market (perception)
- firm is not in a position to cooperate with potential
entrants
(b) Moving down the demand curve
- relatively high price (saturate the market) → lower
price (market is saturated) → highest possible
prices (at different market levels)
- objective: keep the price changes slow enough to
pick up volume at each successively lower level,
yet fast enough to keep competitors from
establishing low cost volume sales
(c) Penetration pricing
- recall: Market penetration
- high price elasticity of demand and supply of a
good is subject to major reductions with increases
in volume
- price is set low enough for the marginal buyers
and all above them to become customers
- aims to get an immediate mass market
(d) Pre-emptive pricing
- set price of a product so low that the market is
unattractive to competitors
- with a low price, a large volume is anticipated to
result in satisfactory profits in the long run
(e) Extinction pricing
- price based on variable costs leading to price
wars
- those which remain will have a stronger market
position
(f) Formula pricing
- usually used by wholesalers
- a formula pricing agreement is negotiated with the
buyer
(g) Tie-in pricing
- wholesalers use this whenever they have a large
supply of less desirable varieties or classes of
product together with the limited more desirable
ones
(2) Retailer’s Pricing Strategies
(a) Competitive pricing
- retailers set prices to be near or equal to those in
other stores for products bought on a regular or
irregular basis
(b) Psychological pricing
- odd-centavo pricing: to give the appearance of
having cut prices to the base minimum
(Php 4.31, Php 4.95 and Php 4.97)
- even-centavo pricing or premium pricing: to
portray a quality image
(Php 4.99 vs Php 5.00 or Php 5.50)
(c) Unit pricing
- buyers purchase according to the units on which
the product is purchased
- the gain in volume will offset the reduction in the
per unit price of the product
- e.g., 2 for Php 3.99 → larger purchases; gives the
seller a half-centavo price advantage
(d) Price lining
- offering two or more classes of the same product
at different prices
- apparent differences in
weight/quality/grade/standard resulting to different
prices (at most 3)
- e.g., chicken eggs, mango
(e) Special prices
- buyers purchase other items at regular prices and
this offset the “discounts” on the special items
- consumers would assume that this set of items is
also a best buy
Other Pricing Strategies
1. Based on organization’s costs A. Cost-plus
pricing: Percentage mark-up and Percentage mark-
on
B. Full-cost pricing
C. Incremental-cost pricing
D. Break even pricing
2. Based on markets A. Skimming strategies
B. Penetration strategies
C. Discriminatory pricing: Segmentation pricing,
Product-form pricing, and Time pricing
D. Psychological pricing: Quality pricing, Odd
pricing, Price lining, and Customary pricing
E. Geographical pricing: FOB pricing, Uniform
delivered pricing, Zone pricing, Freight absorption
pricing, and Promotional pricing
F. Administered pricing
Percentage Mark-Up
- Per unit profit as a percentage of cost
Percentage Mark-On
- Per unit profit as a percentage of selling price
Full-Cost Pricing
- All direct costs of production are assigned to the
product and indirect costs (i.e., overhead costs) are
apportioned according to a formula adopted by a
manufacturer
Incremental-Cost Pricing
- Arbitrary allocation of fixed expenses can be
overcome by using this pricing strategy
- Uses only those costs directly attributable to a
specific output in setting prices
Break-Even Pricing
- Covers both fixed and variable costs incurred
Break-Even Volume = Total Cost / Selling Price
Break-Even Selling Price = Total Cost / Production
Skimming Strategy
- Can be employed if the demand is relatively
inelastic
- Product has unique benefits and/or features which
the consumer values
- Innovator initially set a high price due to its
investment costs and as competitors add up
supply, the innovator follows the downward trend in
unit selling prices
Penetration Strategy
- Aims to achieve entry into the mass market
- Emphasis on the volume of sales
- Unit prices tend to be low
- Profit objectives are achieved through gaining a
sizeable sales volume rather than a large margin
per unit
Discriminatory Pricing
- Involves a company selling a product or service at
two or more prices, where the differences in prices
are not based on differences in costs
Segmentation Pricing
- Prices are set to achieve an organization’s
objectives within each segment
- Customers in different segments will pay different
prices for the same product
Product-form Pricing
- Different versions of the product are priced
differentially but often not in proportion to
differences in their costs
Time Pricing
- Done to encourage demand by reducing prices at
times when sales are seasonally low and by raising
prices to contain demand when it is strong and
likely to outstrip supply
Psychological Pricing
- Pricing designed to appeal to emotions of buyers
Quality Pricing
- When buyers cannot judge quality by examining
the product for themselves or through previous
experience with it, or because they lack expertise,
price serves as a quality signal
Odd Pricing
- Creates an illusion that a product is less costly
than it actually is for the buyer
Price Lining
- Selling a range of products in a product line at a
limited number of prices
Customary Pricing
- Low cost products (e.g., confectionary, root
vegetables, and in some instances, staple
foodstuffs) usually maintain the unit price
- Same price but reduced size; higher price and
increased size but by less than a pro rata amount
Geographical pricing
- Geographical considerations in pricing decision
Promotional Pricing
- Temporary reduction in prices to increase sales
- Loss leaders: selected products, mostly staple
foods and beverages, are sold at low prices to
attract customers in buying regularly priced items;
customers are aware of their normal price
- Special event pricing: special sales such as
Christmas sale
- Cash rebates: buy a product from a dealer within
a given time period
Transfer Pricing
- Pricing strategies open to organizations when
transferring goods and services between different
departments, divisions, and/or subsidiaries
belonging to the same parent organization
Administered Pricing
- Imposed on the market by some external body
Circular Flow Diagram

FOB pricing
- Free on Board
- All customer pays the same ex-factory price and
the goods are placed FOB a carrier, at which point
the title and responsibility pass to the customer,
who pays the freight from that point onward
- FOB factory: Customers pay all transportation
costs beyond the factory gates
- FOB destination: Supplier meets all of the costs
incurred up to the point where the goods are
delivered to the customer

Uniform Delivered Pricing

- Opposite of FOB pricing
- Selling price incorporates a freight charge never
explicitly identified as such to the buyer which is an
average of total freight costs
- Easily administered and a company could
advertise its prices nationally

Zone Pricing
- Falls between FOB pricing and uniform delivered
pricing
- Company sets up a series of geographical zones
- All customers within a zone pay the same total
price and this price is higher in the more distant
zones

Freight Absorption Pricing

- Seller absorbs all or part of the transportation cost
in order to get the business
- Useful in achieving market penetration and
holding on to increasingly competitive markets
Exercise 3
DEMAND
Introduction
Demand refers to the different quantities of a good or service that consumers will buy at alternative
prices, holding other factors constant. By virtue of the Law of Demand, quantity demanded is inversely
related to price. As such, demand curves expressed in graphical and mathematical forms are usually
downward-sloping with negative value of slope, except for Giffen goods. If the own price increases,
consumers buy more of the relatively cheaper good over the relatively more expensive good (i.e.,
substitution effect) and their purchasing power decreases (i.e., income effect). This is a case of a
contraction, an upward movement to the left along the demand curve. Whereas, a decrease in price
which leads to an increase in quantity demanded is a case of extension, a downward movement to the
right along the demand curve.
An increase or decrease in demand depicted by a rightward or a leftward shift in the demand curve is
due to various factors such as population/number of consumers and users, age and sex structure,
degree of urbanization, income, prices of related goods (e.g., substitutes, complements), consumers’
tastes and preferences, environmental factors, socio-cultural factors, policy factors, and consumers’
expectation of future prices.

Objectives: At the end of the exercise, the student should be able to:
1. explain the changes in quantity demanded and demand for agricultural inputs, products and services;
and
2. express the demand curves in graphical form and mathematical form.

a. Construct Mrs. dela Paz’s new demand curve using the same figure drawn
for Question No. 1a. Express also her new demand curve in mathematical form.
Interpret the slope and intercept of the new demand curve.
b. To make this demand curve meaningful, what assumptions will you make?
 Quantity Demanded for Prawns (kg)
600

500

400

300

200

100

0
0 0.5 1 1.5 2 2.5 3 3.5

c. A decrease in price from PhP500/kg to PhP450/kg caused (a decrease, an increase) in (quantity

demanded, demand) from _______kg to ________ kg. This is a case of (a contraction, an extension).

>A decrease in the price from PhP 500/kg to PhP 450/kg caused an increase in quantity demanded
from 0.5 kg to 1 kg. This is a case of an extension.

4. Explain and illustrate graphically whether there will be a change in demand or quantity demanded for
the underlined agricultural inputs, products, or services. Identify the factor affecting quantity demanded
or demand. Indicate the direction of the movement along the demand curve (extension, contraction) or
shift in the demand curve (rightward or leftward).

> Since the value of the slope is negative, mango in this example, is considered as an ordinary good
because it follows the Law of Demand.

a. The selling price of Bt corn seeds has been cut by seed companies, which affected Bt corn farmers.
b. The government increased the minimum wage rate for farm workers, which affected the farm owners.

c. Due to rising oil prices, multinational companies which provide logistical services to agricultural firms
raise service charges.

d. The frost incidences in Benguet brought the price of vegetables up.

e. The Zero Coke Movement campaigns that aspartame, an artificial sweetener, found in Coke Zero
causes cancer.

f. UPLB professors had a salary increase after the Merit Promotions shifting their consumption from fast
food meals to restaurant meals.

g. Chickenjoy was not available in many Jollibee branches making disappointed customers buy Chicken
McDo.

h. A media report states that a rice shortage might occur in two days’ time.

i. An increase in the number of working mothers and people adopting a more sedentary lifestyle has
affected fast food consumption.

j. Korean drama and K-pop followers in the Philippines have been increasing in recent years and this
has led to many Filipinos experiencing Korean culture through food such as kimchi.

5. Market demand is the summation of all individual demand curves. Assume that there are only five
wholesaler-retailers supplying mangoes in San Pedro, Laguna public market. Further, assume that they
account for 99 percent of the market for mangoes in the municipality and the amount they sold
represent the demand for the product.

a. Determine the market demand for mango.

b. Construct the individual demand curve of each wholesaler-retailer and the market demand curve in
San Pedro, Laguna. Compare and contrast the six demand curves.

c. Express the market demand curve in mathematic form. Interpret the slope and intercept of the market
demand curve.

d. Of what use will your knowledge of market demand be?

 90

80

70

60

50

40

30

20

10

0
0 2000 4000 6000 8000 10000 12000 14000 16000 18000

W-R1 W-R2 W-R3 W-R4 W-R5 Market

Since the value of the slope is negative, mango in this example, is considered as an ordinary good
because it follows the Law of Demand.