LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Concept of food marketing

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Marketing of agricultural products

Because of weak relationship,

Traditional approach for the marketing of agricultural products(농산물유통) has been

mainly focused on the flows of products, not the behaviors of company or producers.

Marketing channel has been main research target

Institution or policy regarding marketing channel has been highlighted.

Agricultural

Products

Definition in dictionary :

an integrated process through

which

companies

create value for customers

and

build strong customer

relationships

in order to capture value from

customers in return.

Farmers

weak

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

If we based on the processed food

Flows of products are important, however

Role of food company must be the center of the interest.

Behaviors of food company regarding procurement of raw materials, processing, selling,

transporting and advertising etc. are the main research targets.

Some approaches in the standpoint of Business Management are required.

Processed

food

Definition in dictionary :

an integrated process through

which

companies

create value for customers

and

build strong customer

relationships

in order to capture value from

customers in return.

Food

companies

Strong

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Example of supply chain for a food company

Food

Company

SupplierSupplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Wholesaler

Wholesaler

Wholesaler

Wholesaler

Retailer

Retailer

Retailer

Retailer

Retailer

Retailer

Retailer

Retailer

Supplier

Supplier

SupplierSupplier of service Supplier of materials

C

o

n

s

u

m

e

r

s

Imported

raw materials

Imported

raw materials

Domestic

raw materials

Domestic

raw materials

Domestic

raw materials

Domestic

raw materials

Business Management

: Marketing, supply chain management, advertising etc

The business management of food company can be learned in the Dept. of Business management.

However, some basic concepts and strategies in business management will be taught in the course of “Food

Marketing”

Economic approach is more important in the course of “Food Marketing” , since it deals with the outlook of

the flow, policy, institution, market, welfare, relationship between agricultural and food industry etc.

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics Academic areas of “Food Marketing”

Agricultural

Products

Processing

Selling as a fresh

products

Selling as a

raw materials

Food Company

F

A

R

M

E

R

S

Imported raw materials

Assemblers / wholesalers

Retailing

Big Marts

Market

Super

chains

Small

retailersWholesaling

Viewpoint of

Business management

Viewpoint of

Economics

Viewpoint of

agricultural

Economics

Marketing of agricultural products

Food Supply Chain

production/ markets/ marketing of

agricultural products

Consumer choice, food consumption, consumer welfarePrice theory, policy

Business management

(Supply chain management)

C

O

N

S

U

M

E

R

S

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics Flows of products and functions of players in

“Food Marketing”

Farmers Processing

(manufacturing)

food

Middle men

(Wholesalers)

Food Company

Wholesalers/r

etailers

Selling as a

raw material

Selling as a

fresh product

Retailers

Super chains

Big Marts

C

O

N

S

U

M

E

R

S

Domestic raw

materials

other than

agricultural

products

Imported

raw materials

Export

Two main players

Other

influential

players

If we focus on the flows, products are in the center of interest.

However, if we focus on the functions of the players, interactions between players are important.

Thus, investigation of the functions of the players must be included in the area of “Food marketing”

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Relationship between players and channels

Farmers Wholesalers

Food company

Retailers

Super chains

Big Marts

Food company

Middle men

(Wholesalers)

Big Marts

assemblers

assemblers

Retailers

C

O

N

S

U

M

E

R

SFarmers

Farmers

Farmers

Farmers

Farmers

Farmers

Farmers

cooperatives

There also exist competition between players at a same stage of marketing channel. (Pfa > ? < Pfc )

Competition between channels exist. (Pf1 > ? < Pf2 / Pr1 > ? < Pr2 )

Retailers

Pf1

Pr1

Pf2

Pr2

Pfa

Pfc

And some analysis of marketing costs are required

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Topic areas in “Food Marketing”

Farmers Processing

(manufacturing)

food

Middle men

(Wholesalers)

Food Company

Wholesalers/r

etailers

Selling as a

raw material

Selling as a

fresh product

Retailers

Super chains

Big Marts

C

O

N

S

U

M

E

R

S

Domestic raw

materials

other than

agricultural

products

Imported

raw materialsSome investigation of the international trade regarding

food and raw material is required

Some production theory of a firm is required

Some theory of market for food and agricultural products is required

Some investigations for the institutions such as wholesalers, retailers, super chains, big marts are required

Some theory regarding food consumption is required

Export

Some theory regarding behaviors of company and market agents are required

Some investigation of the

policy regarding

marketing is required

Price and

marketing cost

analyses are

required

Relationship

between

marketing

agencies need to

be investigated

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Basic Price analysis: Supply and Demand

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Demand Curve

Demand curve: the relationship between the amount of a good that

is willing to be purchased at given prices, holding other factors

constant.

Law of Demand :

The quantity demanded and prices have a negative correlation:

The demand curve shows downward sloping.

Q

D

P

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Determinants of Demand

Income

Normal good: the goods that quantity demanded is increased when income gets larger

Inferior good: the goods that quantity demanded is decreased when income gets larger

Prices of other Goods

Prices of substitutes

Prices of complements

Advertising and consumer tastes

Population

Consumer expectations

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Demand function

A general expression for the demand curve

Qd = f(P; Pr, I, Y)

Qd = quantity demanded.

P = price of a good.

Pr = price of other good.

Substitute good.( Ps)

Complement good( Pc)

I = income.

Normal good.

Inferior good.

Y = any other variable affecting demand.

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Demand function: example

Demand Function

Demand: Q = 20 − 4P

Inverse Demand Function:

4P = 20 – Q

P = 5 – 0.25Q

P

Q

5

20

change in demand

v.s.

change in the quantity demanded

3

8

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Demand function: example

Demand Function:

Demand: Q = 20 − 4P+ 2I

Inverse Demand Function:

4P = 20 + 2I – Q

P = 8 – 0.25Q ( I = 6)

P

Q

5

20

change in demand

P = 8 – 0.25Q

3

12 24

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Consumer Surplus

The value consumers get by purchasing a good but do not have

to pay for

The concept of consumer surplus is useful in the analysis of

marketing

It is applied to marketing strategies such as value pricing and

price discrimination.

<value pricing>

It sets selling prices on the perceived value to the customer, rather than

on the actual cost of the product, the market price, competitors prices,

or the historical price

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Consumer Surplus

P1

P2

P3P4

P5P6

P7

consumers3 5 7

2 4 6

Market price (P)

Surplus for consumers 1~7 =

Willingness

to pay

Individual consumers pay the market price which is below the their own willingness to pay

Curve of Willingness to pay

= demand curve

1

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Market Supply Curve

The supply curve is the relationship between the amount of a good

that will be produced at given prices.

Law of Supply

The quantity demanded and prices have a positive correlation:

The supply curve shows downward sloping.

P

Q

S

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Supply Shifters

■ Input prices

■ Technology or government regulations

■ Number of firms

Entry

Exit

■ Substitutes in production

■ Taxes

Excise tax

Ad valorem tax

■ Producer expectations

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics Example: Profit maximization problem of food

company

iiiifii FQCQPPQ )(

)(*2*2*1*1)( i

p

ii

t

ii

t

iii QCQDisCQDisCQC

i

t

i QDisC *1*1

i

t

i QDisC *2*2

)( i

p

i QC

iF

: transportation cost for raw material

: transportation cost for the food

: fixed cost

if QP : Raw material procuring cost

iPQ : total revenue

Change raw material suppliers

: other costs

Locate a factory in different site

: manufacturing cost

Change the wholesalers or retailers

Adopt new technology

Advertising, R & D How does this kind of strategy affect the whole food supply chain?

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Supply function

A general expression for the Supply curve

Qs = f(P; PR, W, M)

Qs = quantity supplied.

P = price of a good.

PR = price of production substitute

W = input prices

M = any other variable affecting supply.

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Producer Surplus

The producer surplus is the amount that producers benefit by

selling at a market price mechanism that is higher than they would be

willing to sell for.

P

Q

S0

Q*

P*

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Market Equilibrium

Demand Function

Supply: Q = 4P

Inverse Supply Function:

Demand: Q = 20 − 4P

If a market equilibrium is attained, there is neither shortage nor

surplus

20

2.5

P

Q10shortage

surplus

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Some policy effects

Price support (price floor)

P

Q

In order to support the price Pa, government needs to purchase the

remaining amount(excess) other than the quantity demanded by

consumers.

Spending budget is required.

Pa

LESE204

Depart

ment of

Food a

nd R

esourc

e E

conom

ics

Some policy effects

Price ceiling

P

Q

There is excess demand

Full Economic Prices

Pce