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Price Differences Associated with Quality - Essay Example

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Price Differences Associated with Quality Introduction It is a basic economic concept that a change in product/service quality has a direct impact on that particular product’s/service’s price. Hence, it is widely accepted that difference in quality is an important product characteristic to be taken into consideration while identifying products…
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Price Differences Associated with Quality
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Price Differences Associated with Quality

Download file to see previous pages... This paper will critically analyze the price differences associated with quality by giving a specific focus on imperfect competition and price differences. Effects of grade quality on demand According to an observation, “grade quality is the distinguishing feature or grade of the product in appearance, performance, life, reliability, taste, odor, and maintainability etc; these are generally called as quality characteristics” (Charantimath, 1). The grade quality or quality characteristics can have a great influence on the demand of a product because quality and price are the major determinants of a product’s market demand. Economic theories state that a change in quality can make a shift in the demand curve. When two identical products with different quality levels are available in the market at the same price, consumers would buy the product having superior quality. To illustrate, demand for Giordano’s pizza is greater than that of Papa John’s at a given price. It happens because consumers believe that Giordano’s pizza has higher quality and therefore it would better satisfy their needs than Papa John’s pizza would do. ...
It is observed that modern people are able to determine their needs precisely; hence, they can accurately identify product quality characteristics that are necessary to serve those needs. It is obvious that improved quality characteristics may better serve an individual’s needs. In other words, a consumer would get greater level of utility from a product with higher grade quality. Generally, a consumer always tries to acquire increased utility with minimum amount of money. In short, it can be stated that a product with higher grade quality will have increased market demand or demand is positively affected by grade quality. Referring to the law of demand, it is clear that the price of a product is directly proportional to its market demand. As discussed earlier, a product with higher grade quality will have a high level of market demand which in turn leads to an increase in its price. Maintenance of quality-price relationship is necessary for stabilizing an economy. To illustrate, majority of the agricultural products have predetermined grade quality standards and hence their price considerably varies in accordance with grade quality changes. Agricultural yields with a lower quality are paid minimum prices while marketers are ready to pay higher for high quality agricultural yields (“Grain marketing plans for farmers”). However, the law of diminishing marginal utility is also applicable to quality-price relationship. The law states that utility derived from the consumption of a product diminishes with each unit of the same product additionally consumed. Hence, a product’s price will not be increased beyond a certain level if a person continuously consumes a ...Download file to see next pagesRead More
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