AGEC 314 - M3 - STUDY QUESTIONS COMPLETE .docx - Title of...

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Title of your work: Study Questions Chapter 7: 1a) A price discovery system is the process of buyers and sellers arriving at prices for a commodity when market conditions don’t permit either group to set prices. Price discovery occurs when all market participants are individually price takers or price negotiators. 1b) One major type of price discovery system is organized markets. These are frequently referred to as “public markets” because the operations are quite public. A benefit of organized markets is that they are structured to give all potential sellers and buyers public access to one another as they discover prices. Also, they generally result in higher level of pricing efficiency. Two disadvantages are that it could lead to poor communication among the market participants and they focus more on their personal goals rather than the overall companies’ objectives. Another major type is decentralized markets, which is where top management delegates decision-making to middle and lower subordinates so they can focus on major decisions. Advantages are subordinates could be more motivated and another is there could be more diversification among the products. Disadvantages are it is expensive, with subordinates carrying more on their plate than they would in a centralized market they are often paid more. Also, there could be a loss of control among the company with some subordinates thinking or doing more than their managers are, which could cause problems internally in the long run. 1c) A price-setting system is where price may be set by sellers, either individually or collectively; buyers, individually; or the government. 1d) Firm price making is much more likely for differentiated products than for commodities. The differences must be explained in terms of competition, the nature of the product, and the nature of basic supply-and-demand forces. A disadvantage is it is not practical or used as much as other pricing systems for commodities. An advantage is being able to set your own price and can change it at your will. Group negotiation prices in agriculture consist of farmers negotiating as a group with individual buyers. An advantage to group to group negotiating is generally, prices are more stable during a season than if they were determined in a price discovery system. A disadvantage to this method is that groups generally have no power to control entry or exit of producers to industry output. Government price setting when the government sets regulations on prices such as, a price ceiling or price floor to keep the prices in equilibrium. A disadvantage to government price setting is that sometimes a price ceiling, the disruption of a price ceiling on food markets, long- term effects on farmers output, administrative complexities, and ideological considerations generally discourage a price ceiling except under the extremities of war. An advantage to this

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