Agribusiness EXAM #1 Study Guide

Since 1950, the distribution of farm numbers and annual sales has shifted to where ____ percent of US farms produce approximately _____ percent of the total US output.

2 and 50.

Raw commodities flow from farms and ranches directly to food manufacturers in the Agri-Food System.

True.

Corporate farms dominate the US farming landscape with 99 percent of all farms and acreage in the US being owned by corporations.

True.

Business management is a profession that applies knowledge from a diverse set of academic disciplines such as economics, statistics, psychology, and mathematics.

True.

As the agri-food system has evolved and become more efficient since 1950, who are the biggest benefactors of the increase in scope and size of the system?

Consumers.

A single farm worker produces, on average, enough food for ___________ people.

150.

Farmers receive approximately _________ percent of each dollar spent on food.

16.

The average American consumer spends about ________ percent of their disposable income on food

11.

United States farmers produce ______ percent of world agricultural output.

12.

Agribusinesses create around _______ new food products each month.

1,000.

Agribusiness management is all about the ____________ and integration of technology in ways that __________ people's well-being.

Adoption; improves.

Being an effective manager is all about doing things well and at the lowest cost.

False.

The Three Es of Long-Run Business Success are:

Efficiency, Effectiveness, Economic Well-Being.

Good decision making requires clear and logical thinking. Managers must understand the problem, objectively weigh alternatives, effectively implement the best solution.

True.

All members of the food system must be concerned with satisfying consumer needs in order to earn a profit.

True.

Often the most difficult step in the decision making process.

Problem identification.

The Four Functions of Management are:

Planning, Organizing, Controlling, and Directing.

The unifying theme that ties everything a manager does together is the desire to maximize the _________ ________ of the firm by profitably ______________ customer's needs.

Long-term profits; satisfying.

Planning starts with a business plan. The business plan begins with the purpose (what the firm intends to do) and the objective (how to accomplish the purpose).

False.

This management function is often the most time consuming function using up some 90 percent of a manager's time.

Directing.

In order to increase consumer satisfaction the marketing system must find ways to overcome five barriers to consumer satisfaction. The five barriers to consumer satisfaction are:

Ownership, Time, Space, Value, Information.

Marketing encompasses only the business activities that address the time and space barriers by coordinating the flow of goods and services from producers to consumers.

False.

The marketing approach is based on the idea that a successful firm first finds out what consumers want and then develops a product that meets those needs.

True.

The marketing system performs nine functions (selling, buying, storage, transportation, processing, grades, and standards, financing, risk-taking, and market information) to complete the production process and add four types of utility to products. What are the four types of utility (satisfaction) consumers receive?

Form, Place, Time, Possession.

When done efficiently and fairly, marketing improves the overall efficiency of the economy, increases producer profits, and increases consumer satisfaction.

True.

Economics gives people the ability to make good decisions when faced with choices about where to spend their time, money, and energy.

True.

What marketing function overcomes the separation of time barrier?

Storage.

What marketing function overcomes the separation of space barrier?

Transportation.

What marketing function overcomes the value separation barrier?

Processing.

What marketing function overcomes the value, time, and space separation barrier?

Financing.

What marketing function overcomes the separation of ownership barrier?

Buying and Selling.

Effective managers manipulate the Four Ps of Marketing to find the right mix of attributes that meet consumer needs. The Four Ps of Marketing are:

Product, Price, Place, Promotion.

Prices set at a level just below estimated perceived value of the product.

Value-Based Pricing.

Add a constant margin to the basic cost of the individual product or service.

Cost Pricing.

Establish prices that are emotionally satisfying.

Psychological Pricing.

Product offered at a high price to make high profits from initial sales.

Skimming the Market.

Prices for extra sales just above marginal cost.

Contribution-to-Overhead (CTO) Pricing.

Where a low price initially leads to broad market acceptance quickly. Normally used to introduce new products.

Penetration Pricing.

Reduction from list price.

Discount Pricing.

One or more products in product mix are offered at special low price to encourage long-term adoption of that particular product.

Loss-Leader Pricing.

High prices to communicate prestige image.

Prestige Pricing.

Based on competitors’ prices; maybe be below or above that of other competitors.

Competitive Pricing.

Sales is the focus of the modern marketing system.

False.

The act of __________ a consumer need is what gives a business its ________ to earn a profit.

Satisfying; right.

Consumers purchase the satisfaction that products give them, not goods and services.

True.

When performing the _________ Function of Management, marketing managers need information on sales, prices, market shares, profit levels, and so on to evaluate their decisions in these areas and to determine whether they need to be changed.

Controlling.

The foundation for a firm's product offering is the expected product which delivers the bare minimum set of features that the customer expects.

False.

Higher price elasticity of demand means that a consumer’s demand is:

More responsive to price changes.

What is the arc elasticity formula?

Elasticity = [(final quantity - initial quantity)/average quantity] ÷ [(final price - initial price)/average price

• Average = final value + initial value)/2

Scenario: When the price of wine is $10 per bottle, Thomas purchases 30 bottles every month. Later, the government introduces a 50% tax on all alcoholic beverages, which is to be completely borne by consumers. This increases the price per bottle and reduces Thomas's consumption to 12 bottles of wine a month.
Calculate Thomas's arc price elasticity of demand for wine and give your answer in absolute value (no negative sign):

FORMULA: (Q2 - Q1) / ((Q2 + Q1)/2 ÷ (P2 - P1) / ((P2 + P1)/2)

1. (12 - 30) / ((12 + 30/2) ÷ (15 - 10) / ((15 + 10)/2)

2. (-18/21) / (5/12.5)

3. |-0.86 / 0.4| = |-2.15| = 2.15

What does your answer in the Thomas’s wine scenario above tell you about his elasticity of demand over the price range? In other words, when the tax is put in place and raises the price of wine (and Thomas reduces his purchases) how would you classify Thomas's response to the price change?

Elastic.

Consumers do not buy products. What is it they actually buy?

The satisfaction the product gives them.

Factors that cause a movement along the demand for a product include:

Change in own product’s price.

If the income elasticity for beef filet is 2.0, this indicates that:

E. All of the above:

A. Sales Response (demand) of beef filet to a rise in income is greater than the rise in income.

B. Beef filet is a normal good.

C. Beef filet is a luxury good.

As an individual consumes additional units of a good, the utility obtained from each additional item _________________.

Diminishes.

If the price elasticity of demand is 1.6 for chicken, cutting the price of the chicken will:

Increase revenue.

American consumers have started consuming more vegetable soybeans (edamame). This change in consumer tastes and preferences would be represented by a ______________ of the demand curve to the ________________.

Shift; right.

Increased herd size leads to greater demand for feed soybean meal, which leads to a greater demand for fertilizer to grow the soybeans, which leads to a greater demand for natural resource extraction to produce fertilizer. This effect is referred to as:

Derived demand.

OWN-PRICE ELASTICITY SCENARIO (PART ONE):

You are the manager at the local brew pub here in Fayetteville. You want to increase revenue and decide to raise the price of a pint of your beer from $2 last week to $4 this week. The list (table) below shows the sales of beer from week 1 and sales in week 2 after you raised price to $4.

  Week  | Price ($/Pint) | Sales (Pints) | Total Revenue

Week 1 |    $2.00 (P1)  |    400 (Q1)    |         800

Week 2 |    $4.00 (P2)  |    100 (Q2)    |         400

Your fellow colleagues from other local bars laugh at you for making a poor managerial decision. Was your decision to raise prices poor in terms of the revenue generated?

a. Calculate change in revenue: 400 (Week 2) - 800 (Week 1) = -400

b. Was your decision a good one or a bad one?: Bad decision because our revenue decreased by 400.

c. Calculate the own-price elasticity of demand (PED) for your microbrew using the arc method → FORMULA: (Q2 - Q1) / ((Q2 + Q1)/2 ÷ (P2 - P1) / ((P2 + P1)/2):

1. (100-400) / ((100+400)/2) ÷ (4-2) / ((4+2)/2))

2. (-300 / 250) / (2 / 3) = -1.2 / 0.6666667

3. -1.79999 = |-1.80| = 1.80

d. Based on your calculated value above, is the PED for your beer elastic, inelastic, or unit-elastic?: Elastic.

OWN-PRICE ELASTICITY SCENARIO (PART TWO):

You decide to build a new facility and begin brewing your own craft beer. You begin to develop a loyal following among local customers for your unique products that are not available at any other bar in town. You were able to increase your average price per pint to $5 and keep most of your business. Because you can increase price and keep sales high your revenue soars.

f. What does this tell you about the elasticity of demand for your product? Specifically, would you say that since developing unique products has the demand for your beer has become more or less elastic?

g. You decide to raise prices to $6 per pint. Do you think this will have a positive or negative impact on your revenues?

f. Less elastic (more inelastic).

g. Positive impact on revenues (with inelastic demand, you can increase revenues by increasing price).

CROSS-PRICE ELASTICITY SCENARIO:

Table 1: Cross-Price Elasticities for Pizza in Fayetteville, AR

Restaurant Demands | Tim’s Price | Z’s Price | Mellow Mushroom’s Price

Tim’s Demand | -2.33 | 0.81 | 0.43

Z’s Demand | 0.53 | -2.17 | 0.14

Mellow Mushroom’s Demand | 1.02 | 0.54 | -2.75

a. What does the value of -2.33 in table 1 tell us about Tim’s Pizza?

b. What do ALL of the positive values in table 1 tell us about the pizza offered by the restaurants in Fayetteville and what would happen if any of these pizza restaurants raised its prices?

c. A 10% increase in the price of Z’s pizza will do what to the demand for Mellow Mushroom pizza? Indicate whether demand will increase or decrease and by what percentage.

a. This is the own price elasticity of demand (PED) for Tim’s Pizza. For example, an increase in the price of Tim’s pizza of 10% would lead to a decrease in the demand for Tim’s pizza of 23.3%.

b. They are all substitutes for each other. If any of these restaurants raise price, the demand for other pizza would increase.

c. Increase the demand for Mellow Mushroom pizza by 5.4%.