THE RELATIONSHIP BETWEEN DEMAND, SUPPLY AND PRICE
Price determines the quantity supplied and the quantity demanded. As the price increases, the supply also increases although the buyers reduce their demand. Therefore there is a tendency on the part of the sellers to cut the price in order to dispose of gradually. And as price fall, demand increases, demand continues increasing until a point is reached when quantity demanded is equal to quantity supplied. At this point the price is called the equilibrium price and the quantity is called equilibrium quantity
Price determination in the market
- Price; is the monetary value attached to a good or service. Price is also said to be money offered, or any other value in the quantity of a commodity offered for sale. (Value expressed in terms of money)
- A market; is a place where buyers meet in close contact with sellers to transact goods and services
It’s an arrangement where the buyers and sellers are brought into close contact with a view of exchanging goods and services for money (price)
Importance of prices in agriculture production
- Price stimulates production and determine what to produce and how to produce it
- Price facilitates full utilization of resources in an economy. High prices for the products enable the producer to have some money to save and re-invest
- Acts as an incentive for growth, higher prices and profits encourages improvement, innovations and inventions
- Price determines the distribution of the products that is it determines who consumes what, people will consume those products they can only afford
- Prices determine the distribution of wealth and income. Since many people get their income by selling one resource or another, the price of the resources they have to sell will reflect the amount of wealth they can accumulate
- Price determines how to produce, the aim of many producers is to maximize profits and in order to achieve this, the producer uses the most economically efficient production techniques
Ways of determining price in agricultural production
- By bargaining (haggling) i.e. The buyer and the seller negotiate on the price
- By auctioning: The price is determined through bidding and the highest bidder takes the commodity
- Price control; Here the government may determine prices through minimum and maximum legislation
- By treaty or agreement i.e. an agreement is reached on at which a certain commodity should be sold at a given period of time
- Re-sale price maintenance; This is a system where manufacturers insist in fixing prices for their products up to the last stage of distribution
- Reserve price; this is the lowest price a seller can accept for the commodity, below that price a seller is not prepared or willing to sell
- Price leadership; this is common in oligopolistic firms whereby the dominant firm sets price and other smaller firms follow
- Through collusion; firms may come into an arrangement and fix the price of a commodity to avoid underselling
Price control is very important especially by government to determine the minimum and maximum prices and to avoid exploitation of producers and consumers respectively
Price determination in a competitive market
The forces of demand and supply of agricultural commodities in a free market determine the price at which the consumers are willing to buy the commodities. Normally as price of a commodity increases, the supply also increases but demand decreases. This eventually creates excess supply over demand. The amount at which the quantity supplied exceeds the quantity demanded is called excess supply.
When the price for maize is very high, demand is very low while supply is very high. The suppliers gradually reduce the price so that they can sell off the excess maize. As price continues to fall, a point is reached where consumers are willing to buy all that is supplied on the market for sale; this price is referred to as equilibrium market price.
At this price, the quantity supplied is equal to the quantity demanded by the consumers. That is; both the consumers and suppliers are in equilibrium hence the term equilibrium point
By definition; equilibrium point is where the quantity of a commodity demanded by consumers is equal the quantity supplied at a particular price. Supply and demand curves intersect at this point
An illustration of how the market forces of demand and supply lead to price determination
When supply and demand are equal (i.e. when the supply and demand functions intersect) the market is said to be at equilibrium
At this point, the allocation of goods is at its most efficient level because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, consumers are satisfied with the current economic condition. At this price, suppliers are selling all the goods produced and consumers are buying all the
goods that are supplied.
Equilibrium occurs at the intersection of the demand and
supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*.These figures are referred to as equilibrium price and quantity respectively. But in the real market place equilibrium can only ever be reached in theory, so prices of goods and services are constantly changing in relation to fluctuations in demand and supply
However if the price is below the equilibrium price, suppliers will be discouraged to bring their commodity to the market and supply will be low but demand will be very high resulting into excess demand due to shortage in supply. The lower the price, the larger the excess demand over supply as buyer will compete for whatever little that will be supplied on the market,
this occurs whenever the price (P*) or quantity (Q*) are not equal. Because of the following;-
- Excess supply created within the economy leading inefficiency in allocation of resources
- Excess demand created when price is set below the equilibrium price and because the price is so low, too many consumers will demand for the good while producers will not be in position to supply what is enough for consumers
In order to sell off goods supplied at higher price P1
, the price has to be lowered to P2
(downward pressure on price). Similarly the low price P2
has to be raised to P1
for producers to supply more goods. The resultant price is the equilibrium price which is attained when the demand and supply curve meet or intersect, at this point quantity supplied is equal to the quantity demanded. There is no shortage and surplus thus the new market price.
|Quantity supplied (kg)
Basing on the information in the table, determine its equilibrium point with use of demand curve and supply
||(ii). Change in quantity demanded
Ø With the aid of a labeled diagram, describe how prices of agricultural commodities are determined in a free and competitive economy. [UACE 2012; No. 7 (a), 2008; No. 8 (a), 2002; No.2 (a)]
This is the prevailing price in the market and the shortage turns the equilibrium price. This is the price by free interaction of the market forces of demand and supply. It is the point where the quantity supplied equals to quantity demanded
The long run equilibrium price is stable because the conditions of supply and demand have settled and this become the normal price
Conditions favoring price mechanism
- Existence of market forces of demand and supply determines the price
- Absence of government interference; there is free entrance and exit of the firm in the industries
- There is perfect knowledge of the market condition i.e. the consumer knows where to get cheap products and producers know which commodities to produce and what profits they are likely to get because they produce what the consumers demand
Merits of price mechanism (price control)
- It encourages competition which leads to more efficient means of production (Improvement of both quality and quantity of goods and services which also raise the price of the commodity
- It leads to efficient allocation of resources i.e. producers producing in response to consumers’ demand
- The profit motive encourages hard work; innovation and invention hence increase in production
- It decentralizes power i.e. individual households and firms make their decisions without any interference at all.
- It avails a wide variety of goods and services which enables consumers to buy from the cheapest seller
- There is consumers independence under this system because the consumer is a king and this is to his advantage to determine what to consume
Demerits of price mechanism
- It may lead to gross income inequality because goods tend to go to those who can pay for them
- There is consumer ignorance which may lead to their exploitation. Consumers are unlikely to buy other commodities at higher prices because they don’t know the similar goods and how they can be got at a given time
- Leads to monopoly which may result into selling commodities at higher prices
- It may lead to unemployment as the inefficient firms that can’t compete are always thrown out of the production cycle and also price fluctuation discourages others from joining
- Encourages wasteful competition as there is duplication of activities and intensive advertising of all which leads to wastage of resources
- It may not allocate resources to priority areas since it is determined by profit margins and many of the goods are of public consumption
- Cheap consumer goods may not be produced i.e. producers will tend to produce highly priced goods that will enable them to get abnormal profits
- It may also encourage the production of luxuries needed by the rich since production is according to demand instead of beneficial centers such as public health facilities among others
- It may lead to over exploitation of resources as producers seek to maximize price. They end up over using the existing resources and this may cause things like over fishing, deforestation, over cultivation, some of which are irreplaceable
This refers to all the activities involved in transforming raw agricultural products into consumer goods
It is the situation where the suppliers bring goods and the buyers are willing to buy the goods at a price acceptable to the supplier
These refer to all activities involved in the movement or transfer of goods produced until when they are utilized by consumers. Marketing functions include the following:
- Buying and assembling: this is the process of purchasing and gathering the small amounts of the products from individual farmers or suppliers and bringing them to a central store so that they are ready for the next operation
- Transportation: it involves the physical movement of the products from their production centers to the consumption centers or stores for processing and grading. It occurs at all stages of marketing. It increases the size of the potential market since it enables the product to reach far off consumers
- Storage: most agricultural commodities are seasonal in nature therefore proper storage has to be done until they are required for consumption (to ensure constant supply to consumers) Advantages of storage
- It helps producers in preserving the quality of their produce.
- It protects the produce from the field pests.
- It protects the crops against harsh weather conditions e.g. rainfall, extreme sunshine for perishable commodities such as vegetables
- It facilitates the processing of the produce.
- It helps farmers to wait for high prices when the supply of the produce on the market is low.
- It improves on the profitability of production.
this is change of the state (form) of the products from its raw form to another form in which it can easily be used and is more accepted to consumers e.g. milling of maize flour.
Advantages of processing
- It increases the market value of the product.
- It increases the shelf life (useful life) of a product e.g. processed milk takes longer period of time before losing value
- It destroys toxins in products e.g. the heating of soya beans destroys the trypsin inhibitors
- It enhances easy transportation of the product as it breaks the bulk of the product
- It is used in the standardization of the product
- It makes packaging easy and this makes marketing of the products more easier
- It improves on the quality of the products in terms of taste, flavour and colour among others
- It reduces wastage of spaces during storage by breaking the bulk of the product
- Easy utilization of the product e.g. grinding of maize into flour makes it easy to prepare/cook
refers to the sorting out of the product into uniform size and according to their quality, size, and colour among others. It makes distribution more effective because different grades are sent to different places depending on demand Importance of grading
- It helps the farmer in fixing the price of the commodity
- It assists the buyer to pay for high quality products
- It helps in standardization and packaging of the products according to uniformity and in determining the suitable market price for the products
- Encourages production and marketing of good quality products thereby increasing the farmers returns
- It facilitates buying and selling by not necessitating personal inspection of the commodity
- By separating products of high quality from those of low quality spoilage is minimized
this is the process of putting commodities in different containers to facilitate handling and marketing of the product.
Advantages of packaging
- It reduces the bulk of the product which makes it easy for handling
- It makes substitution of the product by other unscrupulous traders difficult
- It facilitates quality identification of the products as different qualities are packed in different containers and labeled.
- It reduces shrinkage and damage to the product due to environmental factors.
- It may help to reduce other marketing costs by facilitation of self-service retailing.
- It is used in collecting market information from the labeling on containers.
- It may assist in advertising the product because products are well labeled.
- It reduces the contamination of the product by dust and water (foreign objects).
this is the process of sorting and putting the products according to the accepted level or standard (specification of quality and quantity) in the market. Merits of standardization include
- It enables the establishment of criteria or procedure for inspection and quality control to ensure that the products are safe for consumption
- It avoids exploitation of the consumers by the producers and helps to keep the price of the commodity constant in different places
- Branding: this involves setting of the product into uniform lot according to colour, shape, quality and use among others. It makes distribution more easy and efficient because different brands can be sent to different places depending on the effective demand in those areas. Branding makes products unique from others by assigning them special identification marks.
- Labeling: it gives particulars about the produce, the quantity, the grade and the price. It enables the consumers to know exactly what is in the container however the packing should be attractive
- Financing: money is required to finance all the activities from buying of the materials to final sale of finished products
- Advertising: this is the process of creating awareness of the product to the consumers. It can be done through radios, newspapers, posters and banners.
- Advantages of advertising
- It informs new consumers about the availability of goods in the market.
- It bridges the gap between the producers and the consumers.
- Helps the farmer to introduce new products in the market
- It enables consumers to buy a product hence increase in sale
- It creates direct contact between the farmer and consumers such that other middlemen are not able to increase prices which may lower demand for the products produced on the farm
- It persuades consumers to buy more products of the farm instead of buying those of other producers
- It provides the necessary information on salient features of different products.
- It helps manufacturer to retain his market share and to create inclinations to the mind of the consumers (mental tendency)
- It helps consumers to know the technical use and application of the product.
- Market research: it is important to know all about the market and about demand and supply. Consumers need to know where to sell and at what price. It is also important for producers to know when to produce, where to sell and this would help in fixing the market price
- Risk bearing: as goods move through the different stages of marketing, they are liable to spoilage, loss or total destruction. So somebody has to bear the cost of such negative externalities
Problems faced in agricultural marketing
- Bulkiness; most of the agricultural products have low value in relation to their weight and are difficult to transport because they are heavy and this increases the transport costs.
- High competition with other synthetic substitute products which are usually of low price and more durable e.g. cotton and rubber faces very stiff competition from plastics, nylon and metals
- Limited price elasticity of demand; most of the agricultural products are foods whose demand in relation to price is inelastic because once one is satisfied, can’t take more even if the price is very low
- Lack of market information especially where better prices are hence narrowing the market for agricultural products
- Long production cycle (gestation period): this makes farmers uncertain of the price at harvesting time
- Inadequate storage facilities especially during harvesting. This exposes the produce to bad weather conditions lowering their quality
- Large number of small scale producers; there are many producers that can’t command a sizeable quantity of the market and therefore they can’t be able to meet market demand as a large number makes it hard for them to agree on the selling price and at times are cheated by middlemen
- Low income elasticity of demand; as ones’ income increases beyond a certain point, a proportion of that income on agricultural products fall and that one of manufactured goods increases
- Variable quality of agricultural products due to instabilities and lack of uniformity in weather, handling of products, pests and disease incidences among others. The quality is often variable and this makes standardization and marketing difficult
- Price fluctuations: due to the fact that during harvesting, there is surplus produce that leads to low prices and during the dry seasons, there is scarcity which leads to high prices.
- Seasonality of products; agricultural products are seasonal and as such there is surplus products during harvesting season that results into low demand. In between the season, products become scarce with increase in demand but the farmers can’t produce immediately
- Poor transport facilities e.g. roads yet most farmers are in rural remote areas which delays supply
- Perishability of the produce: agricultural products are highly perishable (rot easily) and therefore they need ready market and consumption which sometime may not be available
- Lack of enough advertising facilities to create awareness of the commodities and those which exists are expensive to use
- Lack of substitute, most agriculture products lack substitutes so in times of scarcity prices become high
- Lack of enough processing facilities, this makes the agriculture products to be sold off in their raw form hence less prices are offered for the produce
- Many farmers stay long distance away from the market centers thus incurring high costs of transport to deliver commodities to the consumers.
Solutions to marketing problems
- By carrying out market diversification measures to open up new markets to consume the excess production and stabilize prices
- Provision of credit facilities to farmers; the marketing process requires financing for it to be more effective. credit facilities would provide money to aid in assembling, transport, processing etc
- Carrying out market research and send information to the farmers, this helps the farmers to produce exactly what consumers want
- Industrialization; this will absorb excess produce from farmers and create market for them
- Making trade contracts and protocols between consumers and producers. This helps to determine the prices of goods in advance and it reduces exploitation by the middlemen (intermediaries)
- By setting up buffer stocks; this can be done by government through creating marketing boards or marketing agencies that would buy all the products every season from the farmers, store and sell them when prices are high
- Establishment of proper communication and transport infrastructure, these help in transporting the produce from where they are in plenty to where they are scarce i.e. to the market. Efficient transportation system enables the products to reach the consumer as quick as possible while still fresh
- Establishment of processing industries; to improve on quality before storage and to reduce on bulkiness so as to increase on its value for good prices
- Through construction of proper storage facilities; these help in collection and assembling of the products. Stores also help to stabilize supply and to preserve the quality of the products
- Proper extensions to farmers; information given to farmers by extension workers enables them to produce good quality commodities that would attract more consumers hence fetching higher prices
- Formation of co-operatives to enable farmers to pool resources together, gather market information, construct storage facilities, organize transport and bargain for better market price collectively
Benefits of controlling the market system by government
- It ensures that the market is not monopolized by a single buyer or seller
- It prevents the dangers of farmers running away from an enterprise beneficial to the country because of unjust prices
- It ensures that farmers are getting what is due to their produce without being cheated
- It encourages more sellers and buyers in the market, this allow competition and fair prices
- It reduces price fluctuation, that is; it ensures price stabilization
- It ensures production of good quality products
- It ensures easy revenue collection by the government
Definitions and terms used in agricultural marketing
- Marketing margin: this is the difference between the purchase price and resale price of product retained by either marketing agency or the marketing system as a whole
- Monopoly: a monopolistic situation means a sole seller who has little or no competition. Monopolies are very few in nature
- Perfectly competitive market: is a situation which exists when no single buyer or seller can by his or her own actions alter the market price. It is also characterized by free entry and exit without any limitations
- Arbitrage: the movement of suppliers between one place to another until prices come into balance taking into account transport costs
It may also be defined as the process of buying a good in one market and selling it at the same time in another market in order to take advantage of the price difference
- Imperfect competitive market: is a situation which exists when the entire supply of any specific product in a unit time is controlled by one seller or a group of sellers who has some agreements among themselves
- Oligopoly: this strictly means few sellers, in this situation few sellers exists and these deal in particular commodities e.g. petrol stations, telecommunication networks among others
It is the market structure in which the number of sellers is small enough that changes in price and output of one farm will affect the price and the output decisions of the others
9 (a), 2004; No. 8 (a)]
- Describe the activities carried out to facilitate marketing of agricultural products. [UACE 2011; No.
(b), 2004; No. 8 (b)]
- What is the role of advertising in marketing? [UACE 2011; No. 9 (b)]
- What problems are associated with the marketing of agricultural products? [UACE 2002; No. 2
- Outline the benefits of controlling of the market system by government. [UACE 2007; No. 9 (d)]
PRICE FLUCTUATIONS IN AGRICULTURE MARKETING
These are the sudden changes that occur in prices of goods and services. The prices may go up (positive change on the side of producers and negative on the side of consumers) or down.
Reasons why prices of agricultural products fluctuate
- Inelastic demand for agriculture products; many agricultural products are food stuffs whose consumption can’t be increased significantly even when the prices are reduced i.e. the price of the commodity has little to do with the demand of the produce
- Perishability of the produce; agricultural products are highly perishable and are not easy to store to even out supply (have poor keeping quality) and need ready market. Price control is therefore hard to enforce by regulation of supply leading to variation in prices.
- Divergence from planned and actual output due to the inability to predict accurately the final output. Agriculture production depend heavily on natural factors such as weather, diseases and pests over which producers have little or no control, there is often a very big divergence than what is expected
- Gestation period; agriculture products requires relatively a long period of time to produce compared to industrial products. This makes supply less elastic and they can’t respond adequately to demand
- Seasonality of production; agricultural products are seasonal in nature therefore during harvesting there is surplus leading to low prices and in between seasons the products are scarce and their prices are high
- Large number of small scale producers; these can’t influence the market in their favour and therefore makes it difficult for them to decide at what price to sell their products. This means that none of them can influence the market
- Bulkiness of the agricultural produce which makes their transportation from production center (areas of plenty) to the market (areas of scarcity) difficult leading to delayed deliveries and low returns
- Variation in the quality of the produce which makes the commodities to be sold at different prices. This may be as a result of pests and diseases, poor agronomic practices, poor-post harvest handling among others and may at times results into rejection of the produce hence low prices
- General lack of alternative use of the resources used in agriculture production; the fertile soils and favourable rainfall used to produce crops have very few alternative uses. Farmers therefore may have to continue producing agricultural products even when prices are low or with no improvement
- Poor transport facilities; this makes the supply and the distribution of produce uneven and at increased transport costs hence variations in prices
- Lack of co-operation among producers; to limit supply of their commodities on the market, that is failure to follow pre-determined quotas
- Lack of proper planning and disorganization among producers whereby producers base their production decision on the current prices on the market but these decisions can only be fulfilled after time lag while demand depends on the current prices when the commodities are supplied
- Competition from artificial or synthetic fibres; this worsens price fluctuation in agriculture as much of the output can only be bought when sellers drastically reduce their price e.g. cotton
- Weak commodity agreements in producing countries characterized by low bargaining powers and as a result, prices are determined by the forces of demand and supply due to lack of conditions attached
Effects of price fluctuation of agriculture products
- Unstable income amongst farmers and as such farmers can’t meet their domestic expenditures
- Discourages installation of capital assets because it reduces savings and sometimes much have been spent on production process yet less is gained
- Increases the risks and uncertainty in farming as farmers get less income that cannot be used to offset risks and uncertainties. This discourages farmers to invest in farming business
- Unstable prices cause severe strain on the country’s balance of payments because the government gets less revenue
- Price fluctuation may become politically dangerous as farmers may blame the government for unstable prices
- Interest payment on borrowed capital becomes a burden to the farmer e.g. when prices fall, farmers may not be able to pay promptly or may totally fail to pay back
- Unstable government revenue due to failure of government to meet its budget or expenditure
- Falling prices makes farmers to incur losses since they sale their produce at low prices as compared to cost of production
- It makes planning or budgeting for the next season difficult because income of farmers is unpredictable
- It causes farmers to hold their product as they speculate or expect increase in prices in future
- Makes some people to abandon agriculture sector to other sectors of the economy
Methods or measures of reducing price fluctuations (stabilizing agriculture market price)
- Establishment of processing plants to improve on the quality of the produce together with keeping the prices high and stable due to better quality of the goods.
- Through construction of proper and improved storage facilities to regulate or control supply by storing excess produce after harvesting.
- Establishment of buffer stocks and price stabilization funds, buffer stocks are products kept in stores and only released when there is acute shortage which is likely to cause a big increase in prices
- Price legislation i.e. by the government fixing the prices of agriculture products
- Diversification such that farmers are encouraged to produce more than one product and in case of fall in price of one, the farmer gains from the other
- Industrialization; this diversifies revenue for government and avoids over dependence on revenue from agriculture goods only
- By carrying out research and disseminate market information. This help to study the marketing trends and makes it fairly accurate to have better position on demand and supply and also in enterprise selection
- Establishment of proper transport infrastructure to move produce with ease and to reduce on the transport costs
- Through improving on the marketing facilities both locally and internationally and this could be done by signing agreements. Internal commodity agreement should be set up to regulate supply of the production and increase the bargaining power of the producers
- Through formation of marketing organizations by the farmers so that a joint marketing carried out for better prices and to improve bargaining power
- Market diversification measures should be undertaken to open up new markets to absorb or consume excess products
- Provision of agricultural subsidies like fertilizers, improved seeds to improve on quality of the products
- Encourage the production of products with less risks of failure or losing quality with time. However improving and encouraging scientific innovations that reduce risks and uncertainties such as irrigation, use of insecticides to control pests should also be embraced.
- Encourage contract farming where prices offered for the products are predetermined in an agreement
Problems faced in implementing the stabilization of market prices
- Conflicting government policy of trade liberalization which discourages price control
- Farmers’ organizations which would organize marketing of farmers’ produce are weak
- Inadequate funding of the agricultural sector
- Poor quality products i.e. production of mixed quality products
- Lack of adequate control mechanism for marketing of products
- High rate of illiteracy among farmers (a big percentage of farmers are peasants)
- Poor communication network especially roads are a setback to free movement of commodities
- Processing plants needs sustainable supplies of raw materials which the nature of our agriculture production cannot sustain
- Competition from synthetic products
Factors that affect the price of a commodity
- Change in demand; as demand increases price is expected to increase and vice versa
- Change in supply; as supply decreases, prices increases and vice versa
- Change in quality of the product; high quality produce fetch high price and vice versa
- Change in government policy on taxation and subsidies e.g. increase in taxation of agricultural products results into high or increased price and vice versa
- Cost of production; if the cost of inputs is high, it leads to high cost of production hence high prices of the produce and vice versa
- Seasonality or festivities; during certain seasons prices of commodities tend to be high e.g.
during Christmas season cost of food rises
- Marketing cost: the higher the marketing cost the higher the price and vice versa
- Nature of market structure i.e. in monopolistic markets it is the producers to determine the price while in competitive markets, the forces of demand and supply determines the price
1997; No. 3 (a)]
- Describe the effects of fluctuations in the prices of agricultural products. [UACE 2008; No. 8 (b),
2005; No. 9 (a)]
- Suggest ways of reducing the effects of price fluctuations on the farm. [UACE 1997; No. 3 (b),
- What problems would be encountered in implementing the measures to reduce price stabilization? [UACE 2005; No. 9 (b)]”