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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

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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.

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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.

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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:

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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)

Individual Demand Schedule of Good X

Price Qty Point on Graph

4 10 A

3 20 B

2 30 C

1 40 D

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 [pic]

C. CHANGES IN DEMAND

F 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).

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).

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 = =

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.

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 than

%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.

ii. Perfectly Elastic:

Where the value of the coefficient is infinity (, demand

is said to be perfectly elastic as shown in the diagram.

iii. Inelastic

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

iv. Perfectly Inelastic:

Where the coefficient of elasticity is zero,

demand is perfectly inelastic.

v. Unitary Elasticity:

When the coefficient to elasticity is 1, there

is unitary elasticity. That is, the %age change

in quantity demanded equals the %age

change in price.

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.

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.

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.

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:

This may be interpreted as the %age change in quantity of x given a 1 percent change in y, other factors held constant.

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.

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 = b

(P

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? ____________________

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

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PART II: The Planning Function

The Business Plan

The Values

Consumer Needs

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

The Financial Objectives

Organizational Plan

Personnel

Plan

Production

Plan

Financial

Plan

Price

A

4

3

2

1

B

C

D

10 20 30 40

Qty

D

A

B

C

10 20 30 40

Price

4

3

2

1

Qty

Market Demand Curve

Price

A

5

B

D1

1

Qty

8

2

Price

Decrease

Increase

Price

5

5

D2

D1

D1

D2

Qty

8

Qty

10

2

3

(Q

P

(Q

Q

(P

Q

P

(P

Q0 - Q1

Ep = Q0 + Q1 = Q0 - Q1 P0 + P1

P0 - P1 Q0 + Q1 P0 - P1

P0 + P1

P

P0

D

P1

Q

Q0

Q0

Q1

P

Q

D

P

[pic]

P

P1

D

Q

D

P

Q0

Q1

Q

P0

P1

D

Q

Q1

Q0

Figure B

Figure A

C

l

o

t

h

i

n

g/

wk

Q2

F

o

o

d

/wk

B

B

Q2

Q1

.A

A

Q1

I 2

Income/wk

I1

Income/week

I2

I1

(Q

EI = =

[

]

[

]

I

(Q

Q

(I

Q

(I

I

EI = =

I1 + I2

Q1 - Q2

Q1 - Q2

Q1 + Q2

I1 - I2

Q1 + Q2

I1 - I2

I1 + I2

(Qx

Exy = =

Py

(Qx

(Py

Qx

Py

(Py

Qx

Exy = =

Qx 1 - Qx 2

Qx 1 - Qx 2

Qx 1 + Qx 2

Py 1 + Py2

Qx 1 + Qx 2

Py 1 - Py 2

Py 1 - Py 2

Py 1 + Py 2

b.

a.

P

P

D

D

Q

Q

................
................

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