Theories of Production and Agricultural Marketing - PDF

Theories of Production and Agricultural Marketing ENGR. JACKIELOU L. PACHES LECTURER, DEPARTMENT OF AGRICULTURAL AND BIOSYSTEMS ENGINEERING MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY  THEORIES OF PRODUCTION Production Functions It is a relationship between inputs...

Theories of Production and Agricultural Marketing ENGR. JACKIELOU L. PACHES LECTURER, DEPARTMENT OF AGRICULTURAL AND BIOSYSTEMS ENGINEERING MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY  THEORIES OF PRODUCTION Production Functions It is a relationship between inputs (factors of production) and outputs (production). Engr. Jackielou L. Paches  THEORIES OF PRODUCTION Engr. Jackielou L. Paches  THEORIES OF PRODUCTION Engr. Jackielou L. Paches  COSTS OF PRODUCTION Types of Costs 1. Explicit costs – what the firm actually pays-out to purchase factor inputs 2. Implicit costs – value of factor inputs owned & used in the production process 3. Fixed Costs – costs of fixed inputs can’t be altered during the production period 4. Variable Costs – costs of variable inputs that can be altered during the production period Engr. Jackielou L. Paches  COSTS OF PRODUCTION Economic Costs 1. Total Cost - summation of all costs incurred in the production 2. Total Fixed Cost - value of fixed inputs 3. Total Variable Cost – value of variable inputs 4. Average Cost – value per unit of output 5. Marginal Cost – additional costs incurred by using one more unit of input 6. Opportunity Cost – foregone opportunity / alternative benefit Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing- Aa series of services involved in moving a product from the point of production to the point of consumption Point of Production - the point of usual first sale by the farmer (maybe done in the farm, farmer’s house, along the road, mountain trail, or assembly market) - transaction occurs between the farmer and the buyer where a price is established Point of Consumption- The point of last purchase or sale; Transaction occurs between the buyer & the seller where a price is established Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Market - a group of buyers and sellers with facilities for trading with each other - a place where buyers & sellers meet to exchange goods or services - a large geographic area wherein a given set of supply & demand forces operate to set prices - consists of 3 elements (buyers, sellers, trading facilities) Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Elements of Market 1. Buyers a. Ultimate buyers – buy goods to satisfy their personal needs b. Industrial buyers – buy goods for resale/for the purpose of transforming it into another form 2. Sellers – suppliers of goods and services 3. Trading facilities Production services – services added prior to the point of production Marketing services – services added after the point of production Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Why Marketing is Costly & Complex? Farms are scattered throughout the country Small production unit of several commodities Large production unit of a single commodity Highly perishable Varied in quality Seasonal Performance of marketing services involves a large amount of money Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing is productive – because it creates utility 4 types of utility 1. Form – change the form of raw materials & create something new 2. Place - when products are made available where they are most wanted 3. Time - when products are made available when they are most wanted 4. Possession – when goods are transferred or are placed under the control of the persons who desire to use them. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing is productive – because it creates utility 4 types of utility 1. Form – change the form of raw materials & create something new 2. Place - when products are made available where they are most wanted 3. Time - when products are made available when they are most wanted 4. Possession – when goods are transferred or are placed under the control of the persons who desire to use them. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Engr. Jackielou L. Paches  AGRICULTURAL MARKETING 4 Approaches to the study of Agricultural Marketing 1. Commodity Approach studying the commodity concerned product-oriented than marketing –oriented study may cover the characteristic of the product, market demand & supply situation, prices, consumer preferences, market potential of new products, etc. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING 4 Approaches to the study of Agricultural Marketing 2. Institutional Approach studying the various agencies & business transactions involved in the marketing processes considers the nature & character of various middlemen & related agencies; also the arrangement & organization of the marketing machinery in this approach, human element receives primary emphasis Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Classification of Middlemen: 1. Merchant middlemen – take title to and therefore own products they handle; buy & sell for their own gain. Examples: Contract buyers Grain millers, Wholesalers - assembler wholesaler or viajeros - Financier - wholesaler or bodegeros/cuartajera - Shippers - Wholesaler - Wholesaler – retailer - Retailer Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Classification of Middlemen: 2. Agent middlemen – act as representative of their clients, do not take title to & therefore do not own the product they handle; income is in the form of fees & commission a. Commission agent – normally takes over the physical handling of the product, arranges the terms of sale, collects, deducts his fees, & remits the balance to his principal. b. Broker – usually does not have the physical control of the product, ordinarily follows the instructions of his principal closely & has less discretionary power in the price negotiations than the commission agent Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Classification of Middlemen: 3. Processors & manufacturers – change form of the products Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Classification of Middlemen: 4. Facilitative organizations – aid the various middlemen in performing their tasks Example: Auction Markets 5. Market Associations – buying & selling of goods Engr. Jackielou L. Paches  AGRICULTURAL MARKETING 4 Approaches to the study of Agricultural Marketing 3. Functional Approach Attempts to answer “what” in the question “who does what” Marketing process Helpful in evaluating marketing costs of various middlemen. Marketing function - is a major specialized activity performed in accomplishing the marketing process. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Functions are classified as follows: Exchange function – activities involved in the transfer of title of goods (buying & selling) Physical functions – those activities that involve handling, movement & physical change of the actual commodity itself; answer when, what, & where of marketing a. storage – making goods available at a desired time b. transportation – making goods available at the proper place c. processing – manufacturing activities (carrying/freezing/drying) Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Functions are classified as follows: 3. Facilitating function – makes possible the smooth performance of the exchange & physical functions; acts as the grease of the agricultural marketing machinery a. Standardization e. Market b. Financing Intelligence c. Risk-bearing f. Market research d. Packaging g. Demand creation Engr. Jackielou L. Paches  AGRICULTURAL MARKETING 4 Approaches to the study of Agricultural Marketing 4. Market-Structure-Conduct-Performance Approach – Markets have three elements that may be the focus of public policy: structure, conduct, and performance Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Market Structure- – the state of a market with respect to competition What are the main criteria used to distinguish the different market structure? ✓ Number and size of producers and consumers. ✓ Types of goods and services being sold. ✓ Availability of information about products being sold. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING CLASSIFICATION OF MARKET STRUCTURE Purely Competitive/Pure Competition – thousands of buyers & sellers; products are homogenous Engr. Jackielou L. Paches  AGRICULTURAL MARKETING CLASSIFICATION OF MARKET STRUCTURE Monopolistic Competition – hundreds of buyers & sellers; products are differentiated Engr. Jackielou L. Paches  AGRICULTURAL MARKETING CLASSIFICATION OF MARKET STRUCTURE Pure Monopoly – one seller market situation Engr. Jackielou L. Paches  AGRICULTURAL MARKETING CLASSIFICATION OF MARKET STRUCTURE Oligopoly - a market structure in which only a few sellers offer similar or identical products Cartel - a group of firms acting in unison Oligopsony – a few-buyer market situation Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing Channels of Selected Farm Products 1. Contract-buyers – a contract is made between the producer and the buyer 2.Wholesalers – merchant middlemen who sell to retailers and other merchants but not to consumers 3. Commission Agents – buy products in local areas and sell to viajeros or assembler- wholesalers; just get commission as payment for their services Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing Channels of Selected Farm Products 4. Wholesaler – Retailers – get produce in large quantities and sell to retailers on wholesale basis as well as to consumers on retail basis 5. Assembler - Wholesalers – they buy from producers & contract buyers, assemble the products in large volume & transport to market centers; also known as viajeros 6. Butcher-Retailers - buy live poultry & livestock & sell them in dressed or carcass form 7. Retailers – sell to ultimate consumers Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Market conduct - refers to the behavior, policies, and strategies used by the firms in the industry. To describe firms’ conduct, economists consider the strategies used by firms as they affect pricing production Promotion distribution Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Market performance - refers to the economic outcomes that result from the market structure and the firms’ conduct. To evaluate an industry’s performance, economists consider allocation efficiency production efficiency Equity technological advancement Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Price - the amount of money which is needed to acquire in exchange some combined assortment of a product & its accompanying services Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Role of Price 1. Tells producers what & how much to produce 2. Allocates productive resources to the production of goods & services that consumers demand 3. Guides goods through the channels of trade so they end up where consumers want them, when they want them, & in the form they want them 4. Ration the goods & services to those who demand them most urgently & in proportions that will all be consumed Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Price Behavior over time Fluctuations in market price occur because of: 1. Fluctuations in demand 2. Fluctuations in supply 3. Experimentation in the price discovery Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Types of Price Fluctuations 1. Seasonal price variation – these are price fluctuations that tend to follow a more or less uniform pattern within the year & are observed to conform to this pattern over a period of years. Examples: - Climate & seasonal demand - seasonality of production - perishability, - short harvest or marketing season, - storage , credit and risk charges involved in holding product over time. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Types of Price Fluctuations 2. Annual price variation – methods of price determination under pure competition can be applied to directly explain year to year product price variation; - typically greater for crops without price support/annual average. Example: Yield sensitive to weather, pest and hectarage planted and harvested can be changed from year to year. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Types of Price Fluctuations 3. Trend – associated with general inflation & deflation in the economy; - changes in the tastes & preferences of consumers; - increases in production & income; - technological change in production Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Types of Price Fluctuations 4. Irregular or Random Price Movement prices that “just happen” unexpected & unpredictable price shift caused by unanticipated forces a. inventions b. Strikes c. physical destruction from typhoons, floods or earthquakes Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Types of Price Fluctuations 5. Cyclical price movement prices fluctuate in regular pattern e.g. livestock production and prices explained by the Cobweb Model - a high price leads to large production, the large supply results in low prices, which in turn result in smaller production, and so forth. Engr. Jackielou L. Paches  AGRICULTURAL MARKETING Marketing Program (4 Ps of Marketing) The Other P’s to consider A marketing mix strategy consists of four parts: 1. Product strategies 2. Pricing strategies Packaging 3. Place strategies Positioning 4. Promotion strategies People Engr. Jackielou L. Paches A. Product Strategies Product – is anything offered for sale, attention, and acquisition Categories of Agricultural Products: 1. Raw or fresh 2. Semi-processed 3. Processed  Product Classifications: a. Consumption & Tangibility 1. Durables 2. Non-durables 3. services b. Effort & Risk 1. Convenience products 2. Preference products 3. Shopping products 4. Specialty products c. Levels of Product 1. Core Product- the problem solving benefits that consumers are really buying Ex. AMC cookware – better health 2. Augmented Product- offering of additional services and benefits Ex. AMC cookware - lifetime warranty, free cooking lessons, free delivery, home demo service 3. Formal Product refers to the product parts, quality level, features, designs, brand name, packaging and other attributes a. Product Mix – refers to the number of products a firm is handling. It can be: a. wide – if there are a lot of product lines b. deep – if there are several products within each line c. consistent – if the products being produced are related  b. Branding Brand – is a letter, word or symbol used to identify products. It has 3 parts: the name, the mark & the trademark c. Packaging – is the total presentation of the product Benefits of packaging: 1. Protects the goods in storage & transit 2. It makes handling convenient 3. It promotes the product 4. It enhances the product Characteristics of a good package: 1. Attractive 5. textural 2. Recognizable 6. dependable 3. Informative 7. functional 4. Immediate 8. labeling A label is a part of a package which carries information about the product. It shows the brand, manufacturer, expiry date, etc. Types of Labels Barcode Brand Name words, letters or number that can be vocalized Top 10 brands in the Philippines Importance of Brand Name Consumer ✓ Easy identification of products ✓ Assured that you get comparable quality when you buy again Seller ✓ Can be advertised ✓ Recognized when displayed in a store ✓ Measure of prestige Trademark is a brand that is given legal protection under Phil. Patent Office it is a word, a group of words, sign, symbol, logo or a combination thereof that identifies and differentiates the source of the goods or services of one entity from those of others. Legal protection under Phil. Patent Office  Benefits of Branding 1. Differentiation 2. Vehicle for communication and promotion 3. Aids advertising 4. Aids recognition 5. Goodwill value 6. Facilitates customer recall and self selection 7. Allows higher price to be charged 8. Improves customer loyalty Characteristics of a Good Brand Names 1. Easy to remember 2. Suggest something about product benefit or use 3. Distinctive 4. Legally protected B. Pricing Strategies Manufacturer’s Pricing Strategies 1. Skimming the Market – holding prices at relatively high level & promoting the product’s effectiveness & value 2. Moving down the demand curve – prices are set at a relatively high point & held there until the market available at that point is pretty well saturated 3. Penetration Pricing – aims at getting an immediate mass market 4. Pre-emptive pricing – set the price of the product so low that the market is unattractive to competitors 5. Extinction pricing – price of the product is set based on the variable costs in order to force firms in weak financial or marketwise positions to discontinue their production  6. Formula pricing – pricing agreement is negotiated with the buyer 7. Tie pricing – negotiate a sale that provides for the inclusion in the purchase of a sought-for product a quantity of the unwanted product.  Retailer’s Pricing Strategies 1. Competitive pricing – set price to be near or equal to those in other stores for products bought on a regular or irregular basis.  Retailer’s Pricing Strategies 2. Psychological pricing – odd-centavo pricing to give the appearance of having cut prices to the base; Minimum/ even- centavo pricing to gain a quality image 3. Unit pricing – pricing items in units of two or more. 4. Price Lining – offering two or more classes of the same product at different prices 5. Special prices – offering items as specials for a given period of time  AGRICULTURAL MARKETING Types of Price in the Market 1. Agricultural Price - result of the forces of D and S which influence production and consumption of agricultural price 2. Farm gate Price - price realized by farmers for their product at the farmgate 3. Wholesale Price- the rate at which a relatively large transaction, generally for further sale is affected. 4. Retail Price- price at which the retailer sells his or her commodity to the consumers in small quantities or volume 5. Export Price- the price which determined in export markets for products intended for delivery outside the customs boundary of the country Engr. Jackielou L. Paches  AGRICULTURAL MARKETING C. Distribution Strategies (Place) Considerations: 1. Number of potential consumers 2. Complexity of the products 3. Distribution budget 4. Seller’s sales & distribution experience 5. Geography Engr. Jackielou L. Paches  AGRICULTURAL MARKETING D. Promotion Strategies Promotion – is the personal and/or impersonal process of assisting a prospective customer to buy a commodity or to act favorably upon an idea that has commercial significance to the seller. Importance of Promotion: makes the buyers aware of alternative goods & services Shorten the distance between the market & the manufacturers regulate the level & timing of demand Engr. Jackielou L. Paches  Methods of Promotion 1.Advertising – any paid form of non-personal presentation of promotion of the products 2.Personal Selling – oral presentation of the product 3.Sales Promotion – are price off, bonuses, lotteries, etc. 4.Publicity – non-personal form of promotion which aims to attract buyers by publishing commercially significant news about the product in different media. 1. Advertising Radio 1. Advertising Television  1. Advertising Magazine  Some Considerations on Promotions 1. Nature of the market 2. Nature of the product 3. Stage of the product life cycle 4. Availability of funds 2. Sales Promotion Examples: - Contest And Prizes - Shows And Exhibits - Premiums And Discounts - In-store Promotions - Sales Incentives - Trade Promotions 3. Public Relations - Publicity Campaigns - Customers Services - Community Projects - Employee Programs 4. DIRECT SELLING - Personal Selling - Electronic Shopping