Question

1. Determine whether each of the following statements is TRUE or FALSE, and write a short explanation for your answer.

a) Higher levels of competition in the market structure lead to a loss of social welfare since firms are spending significant resources to compete with one another

b) Agricultural and food products are usually either consumer or producer products and cannot be both.

c) Full-cost pricing has the drawback of forgoing opportunities that might be profitable from an operating cost perspective

2. Provide a short answer to each of the following questions

a) Briefly, describe the three main challenges in introducing new Ag and food products

b) What is the difference between price theory and cost-oriented analysis?

Answer 1

1. a) In a competitive market, there are several firms producing and supplying products. These firms compete with each other and are guided by market forces such as consumers' demand, number of firms, price of substitutes etc. therefore, these firms try to reduce their cost of production for gaining optimal profits. Under perfect competitive market, all firms produce output at a level where marginal cost equals marginal revenue. This ensures optimal profits for firms and also benefits consumers which means increase in social welfare. Therefore, the given statement is False.

b) Agricultural and food products include a wide array of products such as livestock, poultry and egg, green vegetables, foodgrains, processed food, mustard oil etc. These products such as food grains, mustard seeds and vegetables can be used in food processing companies for production of processed foods that can be sold in consumer market, Therefore, agricultural and food products can be used by both consumers and producers. The given statement is False.

c) Full cost pricing is fixing price of a product above the total cost of production of that good. The total cost of production includes cost of raw materials, labor, installation and maintenance of machinery and marketing costs. The difference between the price and cost of a product is called markup that ensures profits of a firm in the market, However, the full cost price strategy does not consider the prices of products by competitors and customers'' willingness to pay and other dynamic market factors. Operational cost pricing is the best pricing strategy of firms in a competitive market. Under this price strategy, firms determine output and prices of products on the basis of marginal costs. This strategy ensures optimal profits of firms in a competitive market. Therefore, the given statement is True.

2. a) There are three main challenges of new agricultural and food products. First, maintaining quality and nutritional value of agricultural and food products as consumers buy only that products that has superior quality. Second, offering new agricultural and food products at competitive prices to consumers. Third, making continuous improvement in the new products to fulfill the dynamic market demands. These three factors are significant for firms to market their new products and sustain market share in the competitive business environment, Nutritional value means health benefit of a product such as livestock and canned food to consumers and it depends on types of fertilizers, chemicals and other materials used in production of agricultural and farm products. Similarly higher quality and market based price help firms in selling its new products in the market.

b) Price theory is a process of determining prices of products by firms to ensure their optimal profits and market share. A cost oriented analysis or cost oriented pricing is method of determining prices of products by firms that are always higher than their cost of production. Under cost oriented pricing, both output and prices of products are determined by firm itself whereas in price theory, output and prices of products of firms are determined by market factors and firms manipulate their output levels depending upon the consumer demand.