Overview. What determines if a product will move across markets? Overview. Markets Over Space (12/1/09)

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1 Markets Over pace (12/1/09) This Week -- Chapters 9, 10, 11: chrimper Thursday: Return Exams and Last In-Class ssignment Next Week: Markets Over Time Markets over space recognizes that production and consumption in today s U.. food marketing system usually do not occur in the same place Overview Production occurs in various markets due to the region s comparative advantage but consumption occurs worldwide according to taste and preferences and other demand variables. Think about the origin of your breakfast this morning? Orange juice (Florida or California) Eggs (KY) Bacon (NC) Milk (WI) Coffee (Brazil) Fruits (Mexico, Chile, rgentina, Guatemala) Bread (wheat from Midwest) Will there be a price difference across markets? Price ifferences cross Markets (even with homogenous goods and lack of market power among buyers and sellers) P Q Market () Market (B) Why do central Kentucky farmers get less for their corn than farmers in selling their grain to merchants along the Ohio River vs those in the Midwest? Why do Kentuckians have to pay more for fruits and vegetables in the early spring than consumers in Florida and California? Overview Prices for identical products vary across markets due to: ifferences in consumer preferences across markets egree of competition across markets Transportation costs Recall that transportation costs are a significant component of the marketing bill What determines if a product will move across markets? Goods will move across markets assuming the difference in prices in the two markets is large enough to cover the transportation costs. Where: P > TC or P > TC + P = Price in Market = Price in Market B TC = Cost of Transporting the Good from Market B to Market 1

2 Producer Price urfaces hrimper-- Figure 9-1 Producer Price urfaces ssume ecrease in Transportation Costs How would a decrease in transportation costs affect this graph? Note: Net Price decreases as one moves further from the market center How would a market price increase affect this graph? Producer Price urfaces ssume Increase in Price at Market Producer Price urfaces cross Markets hrimper -- Figure 9.5 P P Market Boundary B Consumer Price urfaces hrimper -- Figure 9-3 Consumer Price urfaces Increase in Transportation Costs How would an increase in transportation costs affect this graph? 2

3 Chapter 10: Price ifferences cross Markets --- Two Region Trade Model Excess upply and Excess emand P Excess emand: the schedule of quantities that consumers would like to purchase above the quantity that would be supplied in a given market at alternative prices. i.e. demand for importing a product at a lower price from another market Q Market () Market (B) Would it be better for Market consumers to import from the lower price Market B? Would it be better for Market B producers to export to the higher price Market? To determine the volume of trade and the price one must calculate excess supply and excess demand curves in each market. Excess upply: the schedule of differences between quantities producers would be willing to provide and the quantities consumers are willing to purchase at alternative prices. i.e. demand for exporting a product at a higher price to another market The intersection of excess supply and excess demand yields the quantity traded at a given price that is lower than the original price in the importing country and higher than the original price in the exporting market Two Region Trade Model (hrimper -- No Transportation Costs) Two Region Trade Model (hrimper -- Figure 10-2, With Transportation Costs) P E P E E P E E E Q Q Q Q Importing Market () Exporting Market (B) Importing Market () Exporting Market (B) Trade Results in Winners and Losers On Thursday -- Two Region Trade Model: lgebraic nalysis (read ) Winners will be CONUMER in (pre-trade) high price markets and PROUCER in (pretrade) low price markets. Losers will be CONUMER in (pre-trade) low price markets and PROUCER in (pre-trade) high price markets. Overall free trade benefits society (maximizes total welfare) as scare resources are utilized in a manner that maximizes benefits to the lowest cost producers and provides consumers with a wide variety of food items at their lowest price. P Q P Q E E Q B Importing Market () Exporting Market (B) 3

4 Producer and Consumer Price ifferences cross Markets epends on upply and demand conditions in each market egree of competition across markets Transportation costs. N FOR GOO TRE IN INTERNTIONL MRKET Exchange rates (pp ) Exchange Rates International transactions generally involve two prices The price of the commodity The price (or value) of another currency The ratio between the amount of one currency that must be exchanged for to obtain one unit of another currency is known as the exchange rate. (e.g., $/yen or euros/$) Exchange Rates U.. Trade-Weighted ollar Exchange Rate Exchange rates are determined by the supply and demand for a given currency The demand for U.. dollars is determined by demand by consumers to purchase U.. goods and services and invest in dollar-denominated assets (e.g. stocks, bonds). The supply of U.. dollars is affected by the actions of the central banks and sale of foreign goods, services, assets to mericans. Index Value = Has the U.. dollar been appreciating or depreciating against the Canadian $? Has the U.. dollar been appreciating or depreciating against the peso since the July 2008? Has the U.. dollar been appreciating or depreciating against the Canadian $? 4

5 Has the U.. dollar been appreciating or depreciating against the yen recently? Exchange Rates (continued) If the value of the dollar decreases relative to the yen, how does this affect the cost of U.. tobacco exported to Japan or the cost of Japanese cars imported to the U.? Exchange Rates (continued) ssume the exchange rate is 110 yen per U.. dollar Price of U.. tobacco exported to Japan is $3.75/lb Total Cost to the Japanese buyer is: 110 yen x $3.75 = yen/lb of U.. tobacco 1 U. $ per lb ssume the exchange rate changes to 100 yen per U.. dollar (a decline in the value of the U.. dollar or an appreciation of the Japanese yen) Total cost to the Japanese buyer: 100 yen x $3.75 = 375 yen/lb of U.. tobacco 1 U. $ per lb Exchange Rates (continued) ssume the exchange rate is 110 yen per U.. dollar or dollar per yen (i.e.1/110). Price of car imported to the U.. is 3,300,000 yen Total Cost to the U.. buyer is: 3,300,000 yen x $ = $30,000 for a Japanese car Japanese car 1 yen ssume the exchange rate changes to 100 yen per U.. dollar or 0.01 dollar per yen (a decline in the value of the U.. dollar or an appreciation of the Japanese yen) Total cost to the U.. buyer is: 3,300,000 yen x $0.01 = $33,000 for a Japanese car Japanese car 1 yen Exchange Rates decrease in the value of the U.. dollar: decreases the amount that foreign consumers will have to pay for U.. goods and will increase U.. exports, holding all other factors constant increase the amount that U.. consumers will have to pay for foreign goods and will decrease U.. imports, holding all other factors constant 5

6 Exchange Rates U.. Exports vs the U.. ollar Exchange Rate increase in the value of the U.. dollar: increases the amount that foreign consumers will have to pay for U.. goods and will decrease U.. exports, holding all other factors constant decreases the amount that U.. consumers will have to pay for foreign goods and will increase U.. imports, holding all other factors constant Millions of $ 140, , ,000 80,000 60,000 40,000 20, Exports Exchange Rate Price Competitiveness of U.. Burley Effects of an Increase in the Value of the U.. ollar on Exports of U.. Pork to Japan (Figure 12-3, Vertical xis Expressed in Yen/ollar) Value of the U.. ollar vs Brazil U.. Burley Export Value vs Brazilian Import Value $/lb Yen/$ E E U.. Brazil E gricultural Economics Effects of a ecrease in the Value of the U.. ollar on Exports of U.. Pork to Japan On Thursday, be prepared to fill out the rest of this chart Yen/$ E E 12/04/08 11/20/09 Value of $ (Increase or ecrease) Yen/$ $/Yen Euro/$ 1/93 = /89 =.0112 $/Euro Value of Foreign Currency (Increase or ecrease) U. Exports to: (Japan/Europe) E U.. Imports from: (Japan/Europe) Cost of $100 item (12/04/08) Cost of $100 item (11/20/09) Cost of $100 item (11/20/04) Cost of $100 item (11/20/09) $ = 9300 $ = 8900 Yen Yen Euros Euros 6