Download The 5 Barriers to Consumer Satisfaction or Utilities of

PART II: The Planning Function
Planning starts with understanding the consumers so that managers and employees can seek ways
to meet their demands efficiently and profitably. Planning is done through:
a. Market Analysis: Successful firms use market analysis to determine customers’ needs
b. Forecasting: Employed to anticipate changes in consumer demand.
c. Budgeting: Used to ensure that consumer’s needs are met profitably.
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THEME 3
Marketing Analysis
____________________________________________________________________
Objectives:
 The Mission of Marketing
 The Role of Marketing in the Economy
 The Four Utilities of Marketing
 The Marketing Approach
 Evaluating the Performance of a Marketing System
I. The Marketing Analysis
 Marketing is an outgrowth of consumer demand: It provides consumers with low priced
food. Its goal is to bridge gap between conflicting needs of producers and consumers.
 B. Marketing: It is all activities that coordinate production with consumption: It helps
producers decide what, when, where & how many products to produce. It improves
efficiency of the economy, increases producer’s profits & raises the satisfaction of
consumers. Marketing is the largest part of agribusiness as over 80% of employment
in agribusiness carry out marketing functions.
II. The Marketing Mission
Resolves conflicting needs of producers & consumer
Producers seek to:
Consumers seek to:
1. Maximize long-run profits 1. Maximize satisfaction received
from products consumed with limited incomes
2. Sell large quantities of a
2. Buy small quantities of a large
small number of products
number of products
3. Charge highest prices
3. Pay the lowest prices
A marketing system is needed to resolve these conflicts.
Thus marketing helps find answers to the five (5) key questions that drive every
economic system:
 1. What products to produce
 2. How much to produce
 3. When to produce
 4. Who should produce them, and
 5. For whom goods should be produced
The mission of marketing is therefore to bridge the gap between the conflicting needs of
producers and consumers by completing the production process
II. The Role of Marketing in the Economy
Marketing improves consumer satisfaction in the economy by overcoming 5 barriers to
consumer satisfaction
 The 5 Barriers to Consumer Satisfaction or Utilities of Marketing
Five major barriers prevent producers from efficiently satisfying consumer needs. These
are
- Space or place separation
- Time separation
- Ownership or possession separation
- Value separation
- Information separation
The function of a marketing system is to overcome these barriers.
 Nine Marketing Functions to Overcome Barriers to Consumer Satisfaction
A marketing system must perform nine (9) marketing functions in order to overcome the
five (5) barriers to consumer satisfaction.
A. The Exchange Functions
1. Buying – to overcome ownership separation barrier
2. Selling- to overcome ownership separation barrier
B. The Physical Functions
3. Storage- to overcome time separation barrier
4. Transportation- to overcome space separation barrier
5. Processing- to overcome value separation barrier
C. The Facilitating Functions
6. Grades & standards- to overcome information separation barrier
7. Financing - to overcome form, time, and space separation barriers
8. Risk taking- to overcome time separation barrier
9. Market info- to overcome information separation barrier
 Exchange Functions
- (1 –2) Buying & Selling: Overcome the ownership barrier to consumer satisfaction
by allowing legal transfer of product ownership from seller to the buyer
 B. Physical Functions
- 3. Storage: Overcomes the time barrier to consumer satisfaction by maintaining
products in good condition between production & sale times.
- 4. Transportation: Overcomes space barrier to consumer satisfaction by moving
products from production centers to where the consumer is willing to purchase it.
- 5. Processing: Overcomes value or form barrier to consumer satisfaction by
transforming products to forms that have greater value to consumers.
One of the goals of a marketing system is to transmit consumer desires to producers to
provide the products in the form that customers want.
 C. Facilitating Functions
Include the activities that enable marketing system to operate efficiently.
- 6.Grades & Standards: Overcome the info barrier to consumer satisfaction by
describing products so that buyers & sellers do not have to physically inspect quality of
each shipment before they purchase it.
- 7. Financing: Overcomes value, time, & space barriers to consumer satisfaction by
providing funds to pay for production, storage, & transportation before payment from
sale.
- 8. Risk-taking: Overcomes the time barrier to consumer satisfaction by assuming the
risk of loss before consumption. Various forms of insurance are available to guard against
adverse movements in price as well as physical losses arising from things such as fire,
flood, theft, and spoilage.
- 9. Information: Overcomes information barrier to consumer satisfaction by
disseminating market info on prices, quantities, quality etc. that can influence buying &
selling functions.
III The Four Utilities of Marketing
Performance of marketing functions adds value to products. Middlemen exist because
consumers are willing to pay for the value they add to products by performing the 9
marketing functions
 Utility or Satisfaction: It is the value added by intermediaries that give consumers
greater satisfaction from the products.
The four main utilities added by marketing are:
 Form,
 Place,
 Possession,
 Time
The function of marketing is to ensure that right product (form) is available at the right
place (place), at the right time (time), & at the right price to satisfy the consumer.
IV. The Marketing Approach
 Production and Selling Orientation: Historical goal of agriculture was to expand
output to feed growing hungry population. Thus agricultural marketing goal was
focused on moving products quickly and cheaply from producers to consumers.
Consumer needs were ignored as it was assumed that hungry people would accept any
food product. This has changed.
 Marketing Approach: The Change in marketing was a shift away from a production
and selling to meeting profitably consumer needs. “Based on the premise that a firm’s
success does not come from producing a technically superior product, but from
profitably satisfying consumers’ needs” This is called the marketing approach, first
explained by Theodore Levitt in 1960. He proposed that profitable satisfaction of
consumer needs should direct all activities of the firm.
 Consumer Sovereignty: All areas of the firm must accept the idea of consumer
sovereignty – i.e. the consumer is King & Queen for the marketing approach to
succeed or profitable satisfaction of consumer needs must be the goal of the firm.
V. The 4 P’s of Marketing and The Marketing Mix
Managers have control over 4 variables in their decision making process. These
controllable variables are called marketing mix or the four P’s. The goal of the manager
is to combine the 4 elements of marketing to satisfy consumer needs.
 The Four P’s of marketing
o Product: The firm must provide consumers with a product that gives them
maximum satisfaction
o Price: The right product must carry the right price
o Place: The right product carrying the right price must be in the right place to be
purchased by consumers
o Promotion: The firm must inform consumers in the right way that the right
product, carrying the right price, is available at the right locations
 The Marketing Mix: The combination of the four controllable variables – product,
price, place, and promotion
VI. The Business Plan
The business plan explains how an agribusiness intends to be successful or what a firm is
going to do and how it is going to do it.
 Purpose - What the Firm Is Going To Do: First step in business plan is to formulate
a clear, concise written statement of firm's purpose indicating specific consumer needs
it is going to fill. This implies an understanding the consumers' demands.
 Objectives – How The Firm Will Accomplish Its Purpose: Second step is to set
objectives showing how the firm will to accomplish its purpose or how it will
profitably satisfy the consumer needs.
 Structure of the Business Plan
A business plan is composed of separate sub-plans that deal with organizational structure,
personnel, production, financial and marketing plans:
The Business Plan
Consumer Needs
The Values
The Firm’s Purpose: What the firm is going to do
The Firm’s Objective: How the firm is going to accomplish
its purpose
The Marketing Plan
• Establish the marketing mix
• Analyze the current market situation, the
opportunities & issues, the implementation,
finance, and the control
Organizational
Plan
Personnel
Plan
Production
Plan
The Financial
Objectives
Financial
Plan
Marketing Plan
Successful marketing begins with development of a marketing plan that sets the direction of the
firm’s marketing efforts/activities
 Current Market Situation Analysis: The first step in developing a marketing plan is to assess
the current market situation of the firm and its products. Factors to consider include:
o The Market Situation: Assess consumer needs, market trend & conditions
o The product Situation: Assess sales, revenues, costs & profits of current history (3-5 years).
o Competitive Situation: Major competitors must be identified ( market share, product quality)
o Macroeconomic Environment: Relevant general economic situation must be assessed – e.g.
demographics, technology, interest rates etc.
 Opportunities Analysis: Analysis of market opportunities and threats the firm faces &
evaluation of firm's internal strengths & weaknesses.
 The Marketing Strategy: To achieve the firm’s objectives. Here the manager must mix the 4
P’s of marketing in such a manner as to have right product, at right prices, in right places,
with right promotion (ads) – i.e. marketing mix.
 The Implementation Program: Programs to turn plans into reality – must include
statements of who does what, by when, for whom, and for how much.
 Financial Analysis: The marketing plans must be translated into revenues and expenses.
 Controls: Last step is to decide what types of controls (feedback mechanisms) are needed to
measure the firm’s progress toward its financial and marketing objectives.
Basics of Consumer Demand
To be successful, producers must identify consumer’s needs & fill them quickly.
Principles of Consumer Behavior
Highest Utility: 1st principle is consumers always seek highest level of satisfaction (or
utility) from the pdts they buy.
Diminishing Marginal Utility: 2nd principle of consumer demand is that the amount of
satisfaction obtained from consuming each additional unit of a good (marginal utility)
diminishes as more of it is consumed
A. The Exchange Function: Consists buying & selling. Buying & selling are conducted
in prices, & takes place in markets.
B. Market: A market is place or a mechanism which brings together buyers & sellers.
 Capitalist Economy as a Market: Also called Free Market economy, market price
system or competitive economy where price regulates or allocate resources in the
economy
 Pure competitive market: Assumes large number of buyers & sellers such that no
one can control quantity & price in the market.
Role of Prices in Competitive Economies:
1. Transmit Market Information i.e. prices:
- guide and regulate production decisions
- guide and regulate consumption decisions
- guide and regulate marketing decisions
2. Allocate Resources: Prices allocate resources in our economy or serve as a
rational device in our economy
II. DEMAND ANALYSIS
A. Demand Theory
Definition: Demand is a relationship showing:
 1) the various amounts of a product that
 2) buyers are willing and able to purchase
 3) at alternative prices (all things being equal)
Price
4
3
2
1
Qty
10
20
30
40
Individual Demand Schedule of Good X
Point on Graph
A
B
C
D
Price
A
4
B
3
C
2
1
D
10
20
30
40
Qty
1. Law of Demand: Other things being equal, the quantity demanded of a good varies
inversely with its price, ( or as the price falls the quantity demanded of a good rises and
visa versa). Other things being equal refer price of related products, income, taste etc.
that may affect demand remain the same.
B. Market Demand Curve:
Market demand is the summation of the quantities demanded by each consumer at the
various prices in the market.
Price
C1
C2
C3
Total Market Demand
Points
4
3
4
3
10
A
3
8
5
7
20
B
2
10
9
11
30
C
1
11
13
16
40
D
(C1 + C2 + C3) Market
Price
Market Demand Curve
A
4
3
B
2
C
1
D
Qty
10
20
30
40
C. CHANGES IN DEMAND
 There are two main changes in demand.
1. Change in Quantity Demanded (or Price Factor): This is shown by a change from
one point on the demand curve to another point on the same curve (PRICE FACTOR).
Price
A
5
B
1
D1
Qty
2
8
a. Cause of Change in Qty Demanded: Price of Product in question
2. Change in Demand or Determinants of Demand: This is shown by a shift in the
entire demand curve either to the right (an increase in demand) or to the left ( a
decrease in demand).
Price
Increase
Decrease
Price
5
5
D2
D1
D1
3
10
D2
Qty
2
Qty
8
a. Causes of Change in Demand
• 1. Taste & Preferences Change in tastes to a product will either increase or
decrease demand.
• 2. Number of Buyers: An increase in the number of buyers in a market has an
increase in demand. Fewer consumers will have a decrease in demand.
• 3. Income: For most products, a rise in income will cause an increase in demand
and vice versa.
Note: i. Goods whose demand varies directly with incomes are called
Superior or Normal goods
ii. Goods whose demand varies inversely with incomes are called Inferior
or “Poor Man’s” goods
• 4. Price of Related Goods: Price of substitutes & complements affect demand.
- Substitute: Butter & margarine are substitutes. If butter price rises,
consumers buy less of it & may buy margarine instead - i.e. demand for
butter falls & that of margarine rises.
- Complements: If the price of shoes rises or falls, demand for shoe-laces
may increase or decrease.
• 5. Expectations: Consumer expectations of pay rises, rise in future prices, future
shortages etc. will also affect changes in demand
Demand Elasticity and Related Coefficients
1.
Elasticity of Demand
The responsiveness of quantity demanded to price change. That is, how consumers
respond to quantity demanded as a result of price changes. This responsiveness is
likely to vary from commodity to commodity.
a. Calculation of Price Elasticity: This is simply the ratio that expresses the %age
change in quantity demanded associated with a given %age change in price. Price
elasticity is normally defined for a point on the demand curve.
i. Point Elasticity:
Let  = a very small change; then the mathematical definition of price elasticity is
calculated as:
Ep =
Q
Q =
P
P
Q
P
P
Q
ii. Arc Elasticity: Is the elasticity of an average between two points. Since demand
curve is normally a line between two points, it is preferable to use arc elasticity than
point elasticity.
Q0 - Q1
Ep = Q0 + Q1 = Q0 - Q1
P0 - P1
Q0 + Q1
P0 + P1
P0 + P1
P0 - P1
b. Interpretation of Elasticities
The range of price elasticity coefficient is from zero to negative infinity (i.e. 0 to - )
i. Elastic: If the absolute value of the coefficient is
greater than 1, demand is said to be elastic. i.e. the
%age change in quantity demanded is greater thanP0
P1
%age change in price. We say that consumers
respond favorably to change in price, or for a
small change in price, consumers buy more
of that commodity as shown in the graph below.
P
D
ii. Perfectly Elastic:
P
Where the value of the coefficient is infinity , demand
is said to be perfectly elastic as shown in the diagram.
Q
Q1
QQ00
D
P
Q
iii. Inelastic
P0
If the absolute value of the coefficient is less than 1,
demand is inelastic. The %age change in qty. demanded
is less than %age change in price - for a large change in
price, consumers respond unfavorably to qty demanded P1
P
D
Q0 Q1
Q
iv. Perfectly Inelastic:
Where the coefficient of elasticity is zero,
P
D
demand is perfectly inelastic.
Q
v. Unitary Elasticity:
When the coefficient to elasticity is 1, there
is unitary elasticity. That is, the %age change P0
P1
in quantity demanded equals the %age
change in price.
D
Q0 Q1
Q
c. Price Elasticity and Total Revenue
Since total revenue is price multiplied by quantity, and the two variables are inversely
related, the question whether a given %age increase in price will increase total revenue
depends on magnitude of the corresponding %age change in quantity, which depends in
turn on the price elasticity of demand of the product in question.
i. Revenue and Elastic Demand: If demand is elastic in the relevant range of price,
then price and total revenue vary inversely. That is, a price increase will decrease total
revenue, and a price decrease will increase total revenue. This stems from the definition
of an elastic demand, which means that the %age change in quantity demanded is
greater than the %age change in price. Hence, total revenue increases as price
decreases.
ii. Revenue and Inelastic Demand: If demand is inelastic in the relevant range of price,
then price and total revenue vary directly. That is, a price increase will increase total
revenue and vice versa. For example, the demand for hogs at the farm level in the U.S.
in inelastic. Thus, other things being equal, we would expect farm prices and total
revenue to vary directly. When hog production increases and consequently prices
decline, total revenue falls.
Elasticity concepts can be used in various forms for farm policies. For example, farm
policy measures that attempt to limit supply assume that the demand for the commodity
is inelastic. Otherwise reducing volume would lower the total revenue received by
farmers.
3. Factors that Influence Demand Elasticities
Three primary factors influence the elasticity of demand.
a. Whether good substitute for the product are available
b. Whether or not there are many alternative uses for a product
c. whether the product is an important expenditure in a consumer’s total budget.
The elasticity of demand for a product will tend to be greater the more substitute that are
available, the wider the range of uses of the product, and the more important the product
is in the consumer’s budget.
i. Products without Substitutes have Inelastic Demand: Most raw agric. products
have inelastic demand because there are few substitute products for them. e.g.
different wheat varieties are used to make flour for bread, rolls, cakes and spaghetti.
Because of poor substitutability of the other flours for wheat flour, the price of wheat flour
can be decreased or increased (prices of other substitutes unchanged) without causing
consumers to shift rapidly to or from the use of wheat flour.
ii. Products with Alternative Uses have Elastic Demand: The greater the number of
alternative uses for a commodity, the greater is its price elasticity or the product is price
elastic. For example, the demand for ground beef is relatively elastic because it can be
used for such things as hamburgers, as steak or as ingredient in a casserole. If the price
of hamburgers changes, large variations can occur in the quantities purchased.
iii. Products with Large Expenditures in the Consumers Budget have Elastic
Demand: The demand for automobiles, homes, furniture, television etc. is elastic
because they are large expenditure items and take a large portion of the family budget.
With such items, consumers tend for the best deals, taking into account the quality and
price of substitutes products. Therefore, a small change in price may be noticed by many
consumers, causing a large change in the quantity bought.
d. Income and Elasticity of Demand
i. Engel Curves: The relationship between changes in consumer income and quantity of
an item purchased is called an Engel curve. As income increases more or less of a
commodity may be purchased. If income increases and consumers buy more of a
product, the product is a normal good. An inferior good on the other hand is one that
consumers buy less of as income increases. As a result, a different Engel curve exists
for each commodity and for each individual consumer. For example, the quantity of food
purchased increases as income rises, but at a decreasing rate. The proportion of income
spent for food decreases as income increase as shown in figure A below.
With other items such clothing,
the quantity purchased
changes substantially as
income rises as shown in
Figure B.
C
l
Q2
o
t
h
i Q1
n
g/
wk
I 2 Income/week
Figure A
F
o Q2
o
d Q1
/wk
B
.A
I1
Figure B
B
A
I1
I2 Income/wk
ii. Income Elasticity of Demand: Is a measure of the responsiveness of quantity of a
good purchased with changes in income, holding all other factors constant. This relation
is sometimes called a consumption, or Engel, function and can be calculated at a
point or along a range (i.e. arc) of an Engel curve.
1. Point Income Elasticity of Demand: The income elasticity is defined at a point on
the function as percentage change in quantity bought divided by 1 percent change in
income.
Let I represent income and Q quantity bought, then the definition of income elasticity at a
point is.
Q
I
Q
EI
=
Q
I
I
=
[ ][ ]
I
Q
2. Arc Income Elasticity of Demand: The arc income elasticity is defined as the
percentage change in quantity demanded divided by a percentage change in income
along the range of the Engel curve.
EI
=
Q1 - Q2
Q1 + Q 2
I1 - I2
I1 + I2
Q1 - Q 2
= Q +Q
1
2
I1 + I2
I1 - I2
Analyses such as income elasticity of demand are important in determining the impact
of income changes on the purchases of farm food and other items. The income
elasticity for aggregate food items as well as for individual food product is thought to
decrease as income increases. On the other hand, the income elasticity for non food
items is thought to increase as income increases. Therefore, income elasticity can be
positive or negative. Positive income elasticity indicates normal goods, and negative
income elasticity indicates inferior goods.
e. Cross Elasticity of Demand
It is the measure of how the quantity demanded of one commodity responds to changes
in the price of another commodity, holding all other factors constant.
1. Point Cross Price Elasticity: The point cross elasticity of commodity x with
respect to commodity y is defined as:
Qx
Py
Qx
= Qx
=
Qx
Py
Py
Py
This may be interpreted as the %age change in quantity of x given a 1 percent change in y, other factors
held constant.
Exy
2. Arc Cross Price Elasticity: Arc cross elasticity of demand for commodity X with
respect to a small change in the price of commodity Y can be illustrated with the
following algebraic expression.
Exy
=
Qx 1 - Qx 2
Qx 1 + Q x 2
=
Py 1 - Py 2
Py 1 + Py 2
Qx 1 - Qx 2
Qx 1 + Q x 2
Py 1 + Py2
Py 1 - Py 2
On the basis of three main types of goods i.e. substitutes, complements and
independent, 3 types of cross price elasticity relationships can be identified. These 3
types of relationships are based on the substitution effect of the price change of one
good.
i. Substitute Commodities: If the cross elasticity calculated from the equation is
positive, the two commodities ( X and Y) are called substitutes. In this case the price of
x and the quantity of y move in the same direction. If the price of x increases, then
consumers tend to substitute x for y, and vice versa e.g. peanuts oil and soybean oil. An
increase in the price of peanut oil will decrease its quantity demanded and increase the
demand for soybean oil.
ii. Complementary Commodities: The cross elasticity of demand or the substitution
effect is negative for complementary commodities such as bread and butter. In this case
the price of x and the quantity of y move in opposite directions. An increase in the price
of x (bread) means that the quantity demanded of x (bread) decreases and hence the
quantity of the complementary commodity y (butter) also decreases.
iii. Independent Commodities: The substitution effect is zero for independent
commodities. Independence means that no substitution or complementary relationship
exists between the two commodities.
On these basis, we can say the substitute commodities have positive cross elasticity;
complementary commodities have negative cross elasticity and independent
commodities have zero cross elasticity.
Demand Equation
Change in Demand Qd is dependent on product own price; price of related products;
income; population; taste & preferences; seasonality; & unknown factors. Demand
equation for apples A is as follows
QdA =  - bPA + cPX + dI + ePop + fTF +gS + 
Price Elasticity for Apples is
Ep = Q/Q = Q x P
P/P
Q
P
= Q x P
P
Q
QdA =  - bPA + cPX + dI + ePop + fTF +gS + 
i.e.
Q
P
= b
Review or Practice Questions
1. What is demand?
2. Explain the law of demand.
3a. What are the determinants of demand?
3b.What happens to the demand curve when each of the determinants of demand
change? Use well labeled large graphs to explain your answer.
4. Distinguish between a change in demand and a change in quantity demanded, noting
the cause(s).
5. As a decision maker in an agribusiness firm that deals in different products, discuss
how you can utilize your knowledge of price elasticities as a policy tool to assist your
organization to increase its total revenue (Use graphs).
6. What do understand by market demand and individual demand? Using a well labeled
graphs, discuss the main factors that can cause changes in the demand for apples in
Jonesboro.
7. What might be the long-run results of price controls that maintained a good’s price
below its equilibrium and above its equilibrium?
8. The government increased the minimum wage rate from $4.50 to $5.75 an hour. Will
all unskilled workers support the government’s minimum wage legislation? Discuss by
using a well labeled graphs.
9. What do you understand by the term elasticity?
For Questions 10 – 13 use the following point elasticity equation to calculate the price
elasticity
Ep =
% change in quantity
% change in price
Questions 10 to 13 refer to the following: If a veterinary firm charges $5 for treating dogs
and it treats 20 dogs a day. If it raises its rate to $7 it treats only 18 dogs a day.
10. Calculate the price elasticity? ____________________
11. What is the nature of the calculated price elasticity?
unitary elastic b. elastic c. inelastic d. perfectly elastic
12. What is the change in total revenue from the increase in rate from $5 to $7?
13. What will be your recommendation to this veterinary firm with regard to the
relationship of its price increase and its revenue?
a) Reduce treatment charges for dogs in order to increase revenue
b) Increase treatment charges for dogs in order to increase revenue
c) Leave treatment charges for dogs in order to increase revenue
d) Stop treating dogs to maintain or break even
14. Responsiveness to the changes in quantity demanded of Coca Cola given percent
changes in the price of Pepsi Cola is called
a. substitute goods
b. cross-price elasticity
c. complementary elasticity
d. normal good substitution
15. The price for a rice increases, and as a result rice farmers increase rice production.
This is said to be caused by the role of prices as allocating resources. T/F
16. Indicate four (4) main factors that can explain change in demand (or consumer
behavior) for orange juice_______________________________________
17. If a 1 percentage change in price or income brings a change in quantity demanded of
more than 1 percent, demand is said to be
a. Inelastic
b. Elastic
c. Unitary elastic
d. Perfectly elastic
18. Give two properties of indifference curves? _____________________________
19. Which of the following is an elastic demand curve? ____________________
a.
P
P
b.
D
D
Q
Q
20. The line that shows all combinations of two goods that give a consumer equal
satisfaction is called ________________
1. Describe marketing in your own words.
2. Explain why you feel it is important for people to understand marketing.
3. Explain how completing the production process resolves the conflicting needs of
producers and consumers, and leads to greater consumer satisfaction.
4. Define the five barriers to consumer satisfaction, the nine marketing functions, and
four utilities of marketing. Explain how they combine to raise the level of economic
efficiency in the economy.
5. The goal of the US marketing system is to dispose of what farmers have produced as
quickly and efficiently as possible. Do you agree or disagree? Explain the reasons for
your answer.
6. Define marketing approach. Discuss its relevance to the agri-food system.
7. Explain the relationship between marketing and the four functions of management.
8.Describe and explain how the role of marketing has changed the way agribusinesses
operate.
9.Explain why it is important to adopt the marketing approach to be successful in
agribusiness.
10.
Describe the business planning process and explain the role of consumer needs in
this process.
11. The unifying theme of agribusiness management is maximizing the long-term profits
of the firm by profitably satisfying consumer needs. Explain this in your own words.
Do you agree or disagree with it?
12. Identify the 4 P’s of the marketing mix and explain why they are called controllable.
Explain why you would want to control them.
13. Define the terms utility, marginal utility, and the principle of declining marginal
utility as used by economists. Explain how these terms lead to people consuming
spinach.
14. Explain why price is the best allocator of resources in a free market.
15. Explain why economists made a distinction between consumers who are willing to
and able to buy a product when they talk about demand.
16. Identify and explain the factors that influence consumer demand. Which indicate a
shift in consumer demand? Explain why shifts in consumer demand are important to
agribusiness managers. What should a manager do if a shift in consumer demand for
his or her product is found?
17. Explain why a manager of a fertilizer company needs to pay attention to changes in
consumers’ demand for chicken dinners with mashed potatoes, and the value of the
dollar in foreign currency exchanges?
18. Explain why an agribusiness manager should know if the demand for his or her
products is elastic or inelastic. How does it help the firm achieve higher profits?
19. Explain why an agribusiness manager should be interested in having a clear purpose
and objective.
CASE Study
Jonesboro Food Processing Ltd.
Jonesboro Food Processing ltd., a food processor located in USA, undertook an
empirical estimation of the demand relationships for its frozen fruit cakes. The company
was trying to formulate its pricing and promotional plans for the following year, and
management was interested in learning how certain decisions would affect sales of the
frozen cakes.
As an economist from this class, you have been able to estimate the demand for
the company’s fruit cakes to be a function of the price charged, promotion, price of a
competing brand of frozen cakes, per capita income, population in the Jonesboro area,
and trend or preferences for fruit cakes.
Jonesboro Food Processing ltd had been processing frozen pies for the past 5
years, and their market research department has 3 years of quarterly data for five
districts in the Jonesboro area on sales quantities, the retail price charged for its pies,
local advertising and promotional expenditures, and price charged for major competing
brand of frozen cakes.
Statistical data published by US Statistical Institute on population and disposable
incomes in each of the six districts was also available for the analysis. It was thus
possible to include all the hypothesized demand determinants in the estimation. The
following regression equation was fitted to the data:
Qit = a + bPit cAit + dPit+ eYit + fPopit + gTFit + Uitt
Here Q is quantity of frozen fruit cakes sold during the t th quarter; P is the retail
price in cents of Jonesboro Food Processing ltd frozen cakes; A represents the dollar
amount spent for advertising and promotional activities; PX is the price, measured in
dollars charged for competing cakes; Y is dollars annual per capita income; Pop is the
population of Jonesboro area; and TF is the trend or preference factor. The subscript i
indicates the district from which the observation was taken, and the subscript t
represents the quarter during which observation occurred - i.e., TF = 1, 2, 3, 4, 5, 6, 7, 8.
Least-squares estimation of the regression equation on the basis of 40 data
observations (eight quarters of data for each of the five districts) resulted in the
estimated regression parameters and statistics given in Exhibit 1.
EXHIBIT 1
Estimated demand function for frozen pies.
Q = -500 - 275Pit + 5Ait + 150Pit + 7.25Yit + 0.25Popit +875TFit
(52)
(1.1)
(66)
(3.2)
(0.9)
(230)
Coefficient of determination (R2) = 0.92; Standard error of the estimate = 775.38
F-value = 13.05; Prob F > 13.05 = 0.03284
The terms in parentheses are the standard errors of the coefficients. An analysis
of the error terms, or residuals, indicated that all the required assumptions regarding
their distribution were met; hence the least-squares regression procedure is a valid
technique for estimating the parameters of this demand function.
QUESTIONS
1. Evaluate this model statistically and economically.
2. How many cakes can Jonesboro Food Processing expects to sell in one district with a
95 percent confidence level where price is $150, promotional activities are $1,000, price
of competing cakes are $140, population is 50,000, per capita real disposable income is
$5,000, and the quarter being forecast is the ninth?
3. What is the price elasticity and cross-price elasticity for Jonesboro Food Processing
cakes? What sorts of recommendations could you make regarding their pricing policy?
4. What is the advertising elasticity (percent change in quantity divided by the change in
promotion or A) for Jonesboro Food Processing cakes? The advertising manager feels
that a major effort in this area will yield greater sales. What do you think of his
recommendation, and why?
References
1. Ricketts, C., Rawlins, O.2001. Introduction to Agribusiness. Delmar Thomson
Learning.
2. Beierlein J,. Schneeberger K., and Osburn D. Principles of Agribusiness, Waveland
Press, 2003