Assignment 1 Flashcards
What are common characteristics of Agricultural Prices?
- They’re more volatile than prices of nonfarm goods
- Price differences across time, space, and form
- Strong relationship between commodity prices and biology
- Subject to many market shocks
- Agricultural markets are relatively more competitive
Why is the price for a whole market hog (by pound) so much cheaper than a package of sliced bacon (by pound)?
Because there are many steps between getting a market hog and having bacon.
(Slaughter, process, package, transport, purchase)
What is the price gap called between a final product sold in store and the market price of a whole, unprocessed products?
Marketing margin
Define Price Determination -
How the forces of supply and demand for a particular product or commodity interact to produce an equilibrium price
Define Equilibrium Price -
The price at which quantity demand equals quantity supplied
T/F: Price determination is not concerned with the outcome of any particular transaction.
True
Define Price Discovery -
The process of buyers and sellers arriving at a specific transaction price (how buyers & sellers interact)
Define Opportunity Cost -
The value of the next best alternative available to us.
What are economic profits?
Revenue minus opportunity costs
Define Marginal Opportunity Cost -
The cost of producing one more unit of a product, plus the value of the other products that could have been produced instead.
Define Diminishing Marginal Product -
The observation that as more input is used, the additional output generated by each additional unit of input decreases
Ex: You are a cotton farmer in Arkansas. You make $275/acre growing cotton. You have the opportunity to grow soybeans and make $120/acre or grow corn and make $190/acre. 1) Which is the opportunity cost from continuing to grow cotton in Arkansas? 2) Why would you or why would not you change what you’re growing?
1) $190/acre
2) You wouldn’t switch because neither option will make you as much as growing cotton. So as long as you are making more than the next best thing, you wouldn’t switch.
T/F: Factors that change the marginal opportunity cost of production will result in a change (shift) in supply.
True
If marginal opportunity costs of production increase, the supply will shift to the __a__ and supply will __b__ at every price.
a) left
b) decrease
If marginal opportunity costs of production decrease, the supply will shift to the __a__ and supply will __b__ at every price.
a) right
b) increase
Shifts in supply are, broadly, caused by these three things:
1) Price of related outputs
2) Price of inputs
3) Technology
How do farmers handle not knowing what prices for crops will be at the time of planting (Think planting corn in April to be harvested in July-September).
They set expectations about the future.
Price Expectations
Yield Expectations
Expectations that farmers use are a product of ____ (2 words) in producing commoditites.
biological lag
What are things that price expectations are commonly based on?
- Statistical models (e.g. trends)
- Expert Forecasts
- Past Prices (e.g. previous 5-year average)
- Futures markets
We assume that farmer’s are risk-averse and are willing to pay to transfer that risk to someone else. What does this mean?
Farmers often treat risks like a cost of production.
Changes in risk will shift the supply.
What are tools used by farmers to transfer risks?
Futures contracts (transfer price risk)
Crop insurance (transfer revenue and yield risks)
What does being risk averse mean?
To be reluctant to take risks
In economics, value is measured by maximum ____ (3 words).
willingness to pay (WTP)
Ex: Suppose the UofA is auctioning off a front row parking spot in the blue lot behind the Agri building.
1) The initial bid is $1000. If you bid $1000, I can assume your maximum willingness to pay is __[less than/greater than/equal to]__ $1000.
2) The bid increases to $1500. You place another bid. I can assume you value the parking spot __[higher/lower/same as]__ $1500.
3) The bids reach $2000 and you stop bidding. I can assume your maximum WTP to slightly ___ than $2000.
1) greater
2) higher
3) less
What effect the demand factors?
- Price of substitutes
- Price of complements
- Consumer income
- Taste & preferences
- Seasonality
T/F: The Law of Demand says that there is an inverse relationship between price and quantity demanded.
True
What does the Law of Demand mean?
Quantity demanded will decrease when price increases.
Quantity demanded will increase when price decreases.
What factors change (shift) demand?
- Price of related goods
- Consumer income
- Expectations
- Tastes and Preferences
What is the Law of Supply?
There is a positive relationship between price and quantity supplied.
What does the Law of Supply mean?
Quantity supplied will increase when price increases.
Quantity supplied will decrease when price decreases.
What are common factors that change (shift) supply?
- Prices of related outputs
- Price of inputs
- Technology
What does elasticity measure?
The sensitivity or responsiveness of one variable when another variable is changing.
What does ceteris paribus mean?
With all else constant
What does relative mean in economics?
Refers to the comparison of one economic value (like price) to another.
How much of one good you can exchange for another.
Ex: You make $25.72/hr and bacon costs $7.31/lb. With one hour of work you can buy 3.5lbs of bacon (25.72/hr / 7.31/lb). Wages relative to food prices.
Define Index Numbers -
Measure movements (or average changes) in the price-level relative to a base time period.
(price of food products, relative to itself, at two different periods of time)
T/F: An index number can be thought of as a ratio and is interpreted in the same manner as a percentage.
True
T/F: The Index Number for your base period is always going to be 1.
False, it is always going to be 100.
What is the equation for Expenditure?
Expenditure = price (p) * quantity (Q)
What does CPI-U stand for?
Consumer Price Index for urban consumers
What is the consumer price index?
- A weighted average of a typical market basket of goods purchased
- Uses consumer expenditure shares as weights which are adjusted every 2 years
- Includes the price of more than 80,000 goods
What does nominal price mean?
The current price of a good or service without adjusting for inflation or any other factors?
What does real price mean?
The current price or value of a good or service after adjusting for inflation and other factors.
Real value is more abstract than nominal.
T/F: We can use money to buy any good or service so long as the good or service has a price quoted in the currency.
True
Why does the value of the monetary unit (dollar) changes across time not matter too much?
The relative value of a good does not depend on the value of currency.
How do you get to real prices?
Typically divide the nominal price by an appropriate index.
T/F: You can manipulate an index in favor of the point we are trying to make.
True
Choice of base year can affect the percentage change (relative to base) markedly.
Using 2020 (COVID-19) as a base period.
What is time series data?
A series of data points recorded at even intervals
What does CWT mean?
hundredweight
Typically when selling, think $/100 lbs sold
What is seasonality?
A cyclical pattern of supply and demand (for agricultural) products throughout the year.
What are the different price pattern names?
- Cycles
- Trends
- Seasonality (most prevalent)
What is price seasonality?
Systematic pattern that occurs within a year and is a direct result of seasonal variability in supply and/or demand.
Why do crop agriculture commodities face price seasonality yearly?
Due to most crop productions occurring once each year (harvest time). Available crop supplies must be allocated throughout the year to meet demand.
Why do livestock agriculture commodities face seasonality pricing?
Seasonal prices arise from seasonal fluctuations in available feed and/or length of gestation-birth process for different species.
What is the Super Bowl effect?
A widely known seasonal demand change of chicken wings. In January/February when there are college and professional football bowl games the demand for chicken wings rises (because of watch parties) therefore the prices tend to increase as well.
Turkey demand is ____ during the Holiday season.
highest (/strongest)
At the start of summer grazing season, demand is seasonally ___ for 400-500lb calves in March/April
strong
T/F: Seasonal changes to supply and demand happen individually
False, many things are changing at the same time.
Due to seasonality not happening “in a vacuum” what does that mean for any conclusions drawn about seasonal changes to supply and demand?
Conclusions need to be based on sound economic reasoning and empirical evidence.
T/F: Price seasonality only exists quarterly?
False, seasonal patterns could exist monthly, quarterly, daily, or weekly.
What is the corn marketing year?
September 1 to August 31
[09/01/2025 - 08/31/2026]
As inventories decline, crop prices will, on average, __[increase/decrease/remain the same].
increase
T/F: Carrying of crop inventories and crop price seasonality is directly related to storage costs.
True
The economics of storage is related to ____.
arbitrage.
Define Arbitrage -
Activity of market participants (farmers, grain merchandisers, ethanol plants, etc) who are trying to exploit or take advantage of price differences to extract a profit.
Arbitrage may be defined by __a__, __b__, or __c__.
a) space (buying corn in Indiana vs Iowa)
b) time (selling corn in September vs January)
c) quality
Define Inter-temporal Arbitrage -
Refers to a scenario where market participants exploit price differences through time to earn a profit.
(Selling corn in September vs January vs June)
What would happen if farmers decided to store their corn to sell it during the summer?
Corn inventories would increase enough to lower June/July corn prices.
Can inter-temporal price differences truly earn a profit?
No, not in the longterm
Why do we see price raises of corn in the summer months?
Closely related to the cost of how much it is to store grain/corn during that time.
Decreased supply also leads to increased prices
75-80% of cows that are pregnant will give birth in the spring. Calves are weaned and sold in the fall. What does this mean?
Results in a seasonally large supply of feeder calves in the fall.
Are livestock storable commodities?
NO, livestock PRODUCTS are (milk or meat).
Can seasonal patterns change?
Yes, there could be years where the seasonal price patter does not occur (2020 COVID-19 outbreaks, the holiday season looked different compared to the past)
T/F: A Seasonal Price Index is beneficial to agriculture markets where seasonal factors like planting, harvesting, and consumer demand significantly impact prices.
True
Does a Seasonal Price Index have to follow a calendar year?
No, it follows a calendar year for livestock, but for crops use the marketing year (which is crop dependent)
