Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

Situation II: Producer Ownership. This situation assumes the
producers retain ownership of the product until it is sold in Market B.
Again time costs are incurred, but here they are borne initially by
the producers and may be considered as a form of inventory costs. The
suppliers invest in their product and do not receive a return until
some later date. As production costs increase with quantity produced,
these inventory costs will be viewed as increasing with quantity shipped.
Figure 3.8 may again be used to illustrate these costs per unit if we
now consider i to be the producer's interest rate or capital cost. Given
a perfect capital market these costs will be identical with the time
preference costs of Situation I.
Figure 3.10 integrates these inventory costs into the analysis of
the transportation market. In this case the time costs are added to
Fig. 3.10 -- Two -Market Model with Producers' Inventory Costs
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