Transcript Farm and Food Prices - Derived Demand

Farm and Food Prices Derived Demand
AG BM 102
Introduction
• Consumers rarely buy directly from
farmers
• Instead farmers sell to marketing service
providers, who process, store, transport,
and otherwise add utility, and who sell to
the consumer
• Hence, retail demand is not farm demand
Eggs
• Farmers sell nest run eggs to packer
• The packers wash, candle, inspect, and
sort the eggs
• The eggs are sold to the supermarket
• The consumer buys the eggs
• These marketing services cost about 50
cents per dozen
Egg Demand
Quantity
Doz/cap/yr.
17
18
19
20
Retail Price
$/doz.
$1.30
$1.20
$1.10
$1.00
Marketing
Cost
Farm Price
$0.50
$0.50
$0.50
$0.50
$0.80
$0.70
$0.60
$0.50
21
22
23
$0.90
$0.80
$0.70
$0.50
$0.50
$0.50
$0.40
$0.30
$0.20
24
25
$0.60
$0.50
$0.50
$0.50
$0.10
$0.00
Egg Demand
$1.40
$1.20
DR
$/doz.
$1.00
$0.80
DF
$0.60
MC
$0.40
$0.20
$0.00
16
18
20
Doz/capita
22
24
Farm Egg Supply
Quantity
Price
17
$0.00
18
$0.10
19
$0.20
20
$0.30
21
$0.40
22
$0.50
23
$0.60
Egg Market
$1.40
$1.20
DR
$1.00
$/doz.
PR
PF
$0.80
DF
$0.60
MC
$0.40
$0.20
SF
$0.00
16
18
20
Doz/capita
22
24
Some Points about Graph
• Equilibrium where DF and SF cross
• This is P = $0.40/doz and Q = 21 doz./cap.
• At this quantity Mc = $0.50 and PR =
$0.90
• No incentive to move
• Farm price = Retail price – marketing cost
Demand Equations
QR  30  10 PR
QF  25  10 PF
Elasticities
  b( P / Q )
1
1
R  b( PR / Q)   10(0.90 / 21)   0.428
F  b( PF / Q)   10(0.40 / 21)   019
.
Some Notes
• Farm Demand is derived from retail demand
• When farm market is in equilibrium it defines
retail market as well
• Farm demand elasticity is always less elastic
than retail
• Farmer is separated from consumer by
marketing sector
• If marketing costs rise, farm price goes down
and retail price goes up
Flexibility
The percent change in price in
response to a 1 % change in
quantity
Flexibility
• Applies especially to the demand for
agricultural products
• Useful in recognizing that quantity is
predetermined and prices adjust to clear
market
• Strawberries, tomatoes, other non-storable
products
f  % change
P / % change Q
P  c  dQ
f  d (Q / P)  (1 / b)(Q / P)  1 / 
Calculate Flexibility
fF  1 / ( 019
. )  5.25
fR  1 / ( 0.428)  2.33
Since the farm level flexibility is greater farm
prices move more as the quantity supplied
increases