AECN 235 - Quiz 1 (Module 1)

A commodity can be defined as an economic good that can be legally produced and sold only by selected individuals who own a patent to the product.

False

In commodity markets it is typically true that: (note: only one statement is correct)

producers are "price takers".

A producer of a differentiated product has more marketing alternatives because: (check all that apply)

producers of differentiated products control the supply of the product, since it is patented, copyrighted or trademarked. it is possible to benefit from promoting it.

What are the main characteristics of a commodity market?

Commodity markets share the following general characteristics. (a) The product is homogeneous, i.e. the product is the same regardless who produces it. (b) Since all producers produce the exact same product, producers can't benefit from promoting or advertising their product. In the same line, commodities can't be patented, copyrighted or trademarked. (c) Since there are no patents, copyrights or trademarks for commodities, these markets are typically easy to entry. In other words, once a producer has the knowledge and resources, he/she can easily start producing the commodity and participate in the market. (d) There are many producers. (e) Given the homogeneity of the product (commodity) and the large number of producers, no individual producer can affect the market price. Hence, commodity producers cannot "make" the price in the market (they are "price-takers").

How does marketing commodities (such as corn or soybeans) differ from marketing food products (such as pasta or other types of processed food)?

Commodity producers do not control the market supply of their product, i.e. no individual producer can affect the market price of the commodity. Producers of differentiated products, on the other hand, produce an unique product (or, at least, consumers believe so) and hence they control the whole market supply. Since commodity producers don't control the market supply and cannot individually affect the the market price, they have to "take" the price that is being traded in the market when they want to sell their commodity. In other words, commodity producers don't "make" the price in the market. Keep in mind that, just because commodity producers are "price-takers", it doesn't mean that they have to passively accept whatever price buyers offer to them. Commodity producers can (and should) have a marketing plan that allows them to use different tools (contracts) and sell at different times of the year in order to take advantage of profitable opportunities in the market. Besides, depending on business relationships and the nature of the transaction, commodity producers may be able to negotiate better prices with the buyers.

We discussed that producers of differentiated products are considered "price-makers". What exactly does it mean to be a "price-maker"? Does it imply that a company that is price-maker can set whatever price it wants for its product? Why?

If I produce a differentiated product and hence I am the only producer of this unique product, I control the whole supply of the product in the market. This gives me a lot of power to determine the market price of my product, but not full power to do so. The market price is determined by supply and demand. Even though I control the market supply, the actual price in the market still depends on the demand. If I try to set a very high price, consumers will choose not to purchase the product and I will have to set a lower price in order to sell my product. Therefore, price-makers have a lot of power in setting the market price of their product, but they don't have enough power to set any price that they like.

Commodity producers are considered to be "price-takers", which implies that: (check all that apply)

No single producer can individually control the market supply. Commodities are homogeneous products and hence all producers of a given commodity produce the exact same product (which explains why the third statement is wrong). Since there are many producers who produce the same product, no individual producer can control the supply in the market (so the first statement is correct) and therefore no individual producer is able to determine the price in the market (which explains why the second statement is wrong).

What statement(s) below is(are) correct?

Research evidence indicates that differences in marketing performance help explain differences in profitability of farming operations. A recent experiment at the UNL suggests that profitability in farming operations is driven by a well-balanced combination of production efficiency and marketing.

Discuss the following statement: "Marketing is not important when prices are high and/or rising, because then it is very easy to make a profit."

There are different ways to discuss this statement. The point that I will make is that marketing is still very important when prices are high and/or rising, because in those times we have the opportunity to obtain extra profits that will be useful to keep our business (i.e. farming operation) running or even to expand our business. Prices are not high every year, so there will always be years when it will be hard to guarantee a profit, just like there will be years when we will lose money. When those years come around, having extra funds is important to keep our farm operation running. Those extra funds can be obtained during years when price are high, and this is why marketing is important in times of high prices as well (remember that, when we are running a business, we can't afford to leave money on the table).

Commodity producers have fewer marketing alternatives because they cannot set prices or benefit from individual promotion, since there are many other sellers of the same product.

True