Notes 1: Introduction to Agricultural Markets

1 Economics 335 September 1, 1999 Notes 1: Introduction to Agricultural description of a market and market of a definition of a market defines it as a situation in which buyers and sellers cannegotiate the exchange of some product or products. One might say that it is a group ofbuyers and sellers with facilities for trading. A market may be located in a specific placesuch as the local farmers market , but can just as easily operate without all participantsor the product in question being present such as the market for corn (including futures),or the market for used cars. The traders may be spread over a whole city, region,country or the world as long as they are in close communication with each other and canconvey the necessary information to promote exchange.

2 This definition considers amarket as a general means to facilitate the exchange of goods and services. definition of a market attempts to narrow this explanation to include only oneparticular product (or the product and its close substitutes and complements) and theeconomic interactions of individuals who own, produce, trade and consume thisproduct. This second definition is often imprecise since it not always obvious howgenerally the product should be defined. In a pure sense the product should behomogeneous. Homogeneity is usually defined in terms of form, place, time, andpossession. For example in some cases the product may be exactly the same as far asphysical characteristics (form), but may differ as far as its location (place) or its time ofavailability.

3 In many cases close substitutes must be considered in analyzing a marketas with John Deere and CASE-IH tractors. But the extent to which close substitutesmust be considered is not always this obvious as for example chicken versus beef inconsidering meat consumption. For some purposes one definition of a market isappropriate, for other tasks a different one may be more applicable. In general we willassume that a market under consideration is well defined and involves either ahomogeneous good or a group of differentiated products that are fairly close substitutes(or complements) for at least one good in the group and have limited interactionwith the rest of the economy. differentiation and market mentioned in defining a market , the product under consideration is usually assumedto be homogeneous or close to it.

4 A product that is not homogeneous is referred to asdifferentiated. Differentiated products usually differ by form, place, time or possession. These differences are sometimes called form, time, place and possession utilities thoughthey are not assumed to be utilityProducts that differ physically are said to differ in form. For example, Pepsi andCoke are two similar cola products but they differ (at least to sensitive mouths)physically enough that they are not considered the same product. Similarly withhamburgers, a Big Mac and a Burger King Whooper are physically different. Formutility may also be in the eye of the beholder. Processing is a common way to changethe form utility of a utilitySpeaking of place and time utility Marshall (p.)

5 325) specifies that the more nearlyperfect the market is, the stronger is the tendency for the same price to be paid for thesame thing at the same time in all parts of the market ; but of course if the market islarge, allowance must be made for the expense of delivering the goods to differentpurchasers; each of whom must be supposed to pay in addition to the market price aspecial charge on account of delivery. Place utility is defined as the difference (to a single consumer as an argument in theutility function or in value in general equilibrium) in an otherwise homogeneous goodthat occurs because of the good s physical location or circumstance. Transportation isthe most common way to change the place utility of a utilityIn addition to differences such as those based on location, a good may trade at differentprices or terms based on its date of delivery as evidenced by the pattern of cattle futuresprices or the term structure of interest utility is defined as the difference in an otherwise homogeneous good that occursbecause of the time at which the good will be available for delivery.

6 Storage andfutures or forward contracts are the most common way to change the time utility of utilityIn an advanced economy where legal titles and contract terms are important, the exactrights conveyed with the good may be important. Often the title to delivery of a productwill specify certain terms such as time of payment, limited liability, ability to return theproduct if defective, ties to other products or actions such as agreement to purchaseadditional product, pricing based on some index, etc. All of these terms differentiate anotherwise homogeneous utility is defined as the difference in an otherwise homogenous product thatoccurs because of the terms and conditions of sale and transfer of of market structure market structure refers to all features of a market that affect the behavior andperformance of firms in that market .

7 The keys factors in defining a market structure arethe short run and long run objectives of buyers and sellers in the market , their beliefsabout the ability of themselves and others to set prices, the technologies they employ, theamount of information available to them about the good and about each other, thedegree of coordination or noncooperation they may exhibit, the extent of entry and exitbarriers, and the degree of product differentiation. simple examples of market structuresA number of structures may be described using only the number of firms and entrybarriers as differentiating market StructuresSellersBuyersMarket StructureEntryBarriersNumberEntryBarrier sNumberPossible ExamplesCompetitionnonemanynonemanyHard red winter West (local telephone)Monopsonynonemanysignificanton eApple Computer andMotorolaOligopolysignificantfewnonema nyFarm equipmentOligopsonynonemanysignificantfe wLive cattle for slaughterMonopolisticCompetitionnonemany nonemanyFast competition standard model on which all others are based is the model of perfect (atomistic) competition.

8 This model usually makes seven assumptions concerning market structure. These firms produce homogeneous goods and consumers view them as buyers and sellers have perfect information regarding the price and quality of and sellers cannot influence the price at which the product can be purchased orsold nor do they believe they can affect the prices. In other words buyers and sellers areprice takers. are no transactions costs to participate in the firm bears the full cost of its production process. That is there are no externalitiesthat the firm imposes on others. An example of an externality would be can enter and exit the industry quickly at any time without having to incur specialexpenses. Thus firms have freedom of entry and is perfect divisibility of of a competitive agentA buyer or seller (agent) is said to be competitive if the agent assumes or believes that the marketprice is given and that the agent s actions do not influence the market analysis of six Markets Consider the six Markets listed below.

9 To what extent do they satisfy the conditions for perfectcompetition. In each case give reasons for your for fresh vegetables in Madison, for seed corn in for unskilled farm labor in market for for combines in the United for live cattle in western of Raw chains and market of vertical chainThe process that begins with the acquisition of raw materials and ends with the distribution andsale of finished goods is known as a vertical chain. of market channelA market channel is a description of the set of firms or activities that add place, time, form orpossession utility to a product as it is transformed from a raw material or intermediate productinto one that is purchased by another firm or final consumers. A broadly defined market channelis synonymous with a vertical chain, while a more narrowly defined one may be a subset of aparticular chain.

10 Thus we can say that a market channel is a subset of the vertical chain. chains in agricultureIn studying Agricultural Markets it is often useful to consider not just the exchange of acommodity in one of its forms but to consider the whole chain of Markets that exist fromproduction to consumption. While the form of this chain or channel is different for each good,some general stages usually of form utility by converting raw materials into a specific of time utility if the product is stored after of place utility through of time utility by coordinating delivery and of form utility through sorting, grading of form utility as the product is altered, modified, transformed, of place utility depending on location of of place utility through of time utility through of place utility through transportation and of time utility through of form utility through of place utility in bringing the product home of form utility if the product is prepared by the of time utility through storageLiterature CitedMarshall, A.