VETM 2501: Animal Production I Lecture Notes PDF

VETM 2501: ANIMAL PRODUCTION I LECTURE: GENERAL FARM MANAGEMENT 3 OUTLINE Learning objectives Introduction Supply and demand in livestock production Financial record keeping and its importance LEARNING OBJECTIVES Understand the application of agribusiness Explain supply and demand...

VETM 2501: ANIMAL PRODUCTION I LECTURE: GENERAL FARM MANAGEMENT 3 OUTLINE Learning objectives Introduction Supply and demand in livestock production Financial record keeping and its importance LEARNING OBJECTIVES Understand the application of agribusiness Explain supply and demand in the livestock industry Explain what is meant by price elasticity of demand and supply Explain the agricultural cobweb model of supply and demand Understand financial record keeping and why it is important; appreciate some ways record keeping is done INTRODUCTION Agribusiness is the term used to refer to economic activities and social and demographic derivatives from or connected to farm products Production, processing, transportation, marketing and distribution INTRODUCTION CONT’D Successful and profitable practice requires successful business management Payroll Inventory Budgets Balance sheets SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION In an uncontrolled market, market price for a product or service is determined by demand and supply Market equilibrium: Supply and demand, as well as market prices, will rise and fall until they achieve a balance  SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D Demand refers to the number of goods or services that customers are ready to buy at a given period and for a certain price Consumer tastes and preferences Number of buyers in the market Consumer income Price of related goods Consumer expectations of the future SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D The demand curve is generally downward-sloping There may be rare types of goods that have upward-sloping demand curves Giffen goods (an inferior but staple good) Veblen goods (goods made more fashionable by a higher price) SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D In addition to the changing price of goods, the shift of a demand curve can take place when there is a change in any non-price determinant of demand, resulting in a new demand curve The prices of related goods: Substitutes, complements Income Consumer tastes and preference SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D Price elasticity of demand (PED) is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P It measures how consumers change their demand for a good or service when price changes PED is negative because of the inverse relationship between the price of a good and the quantity of the good demanded – a consequence of the law of demand SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D The elasticity of demand indicates how sensitive the demand for a good is to a price change If the absolute value of PED is 0-1 – demand is said to be inelastic If the absolute value of PED=1 – the demand is unitary elastic If the absolute value of PED>1 – demand is elastic SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D A high elasticity indicates that: Consumers will respond to a price rise by buying a lot less of the good Consumers will respond to a price cut by buying a lot more SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D Supply describes the total amount of a specific good or service that is available to consumers Determinants of supply include: Resource or input costs Production technology Taxes and subsidies Supplier's expectation about the future Number of sellers/suppliers in your market SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D Price elasticity of supply (PES) measures how producers change their supply of a good or service when the price changes SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D The agricultural cobweb model of supply and demand An economic model that explains why prices might be subject to periodic fluctuations in certain types of markets The following period’s production is determined by past or current prices The current price is determined by current production SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D The cobweb model is based on a time lag between supply and demand decisions Agricultural markets are a context where the cobweb model might apply, since there is a lag between planting and harvesting  SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D The cobweb model can have two types of outcomes: 1. If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle A plot of the prices and quantities over time would look like an inward spiral Demand curve more elastic than supply curve This is called the stable or convergent case  SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D 1. If the slope of the supply curve is less than the absolute value of the slope of the demand curve, then the fluctuations increase in magnitude with each cycle Prices and quantities will spiral outwards Supply curve more elastic than demand curve This is called the unstable or divergent case  SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D Example (convergent)  SUPPLY AND DEMAND IN LIVESTOCK PRODUCTION CONT’D First, the farmer faces a price signal (high prices) telling him to raise more pigs, so he does so But it takes a long time to raise a pig Meanwhile, other farmers, receiving the same signal, have also increased their pig production By the time the pig is ready for market, there are too many pigs and the price falls FINANCIAL RECORD KEEPING AND ITS IMPORTANCE Good farm records aid in assessing and mitigating farm business risks Make informed decisions – track profits, losses, expenses Analyze profits – identify most profitable farm enterprise(s) Manage cash flow – ensure enough funds for daily activities Investments – upgrade or diversify Can be used to obtain credit Income tax