1. Marketing Chapter #7

2. What is Marketing? • All the economic activities involved in preparing and positioning the product for the final consumer

3. What is Utility? • Customer satisfaction • consumer needs

4. Form Utility • In what form is a product available • Whole chicken • Chicken parts • Cooked chicken • Each step adds value

5. Place Utility • Where is a product available • Convenience

6. Time Utility • When is a product available

7. What percentage of the final product does the producer receive? • Dairy farmer = 34% for milk • Grain products = 9%

8. 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?

9. Law of Demand Price Demand Quantity

10. 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.?

11. Law of Supply Supply Price Quantity

12. Law of Supply & Demand Supply Price Demand Quantity

13. What is Equilibrium Price? • Price is determined where supply and demand curves intersect

14. Law of Supply & Demand Supply Price Demand Quantity

15. 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

16. How does change in supply affect price, if demand stays the same? Supply 1 Price Supply 2 Demand Quantity

17. 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

18. Futures Market

19. 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

20. Basis • The difference between cash market and futures market • Cash - Futures = Basis • usually negative

21. 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

22. 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

23. 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?

24. 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?