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Economics: Studying at the Margin

In principle, higher prices don't always yield commensurate enhancements of product quality.

As such, the Mercedes-Benz AMG CLA45's $50,000 price tag doesn't necessarily mean that it's twice as good as an entry-level 2019 Chevy Camaro, just as the $500 wallet from Prada is hardly fifty times superior than the $10 counterpart from Amazon.

These price disparities, though shocking or even appalling to the average person, represent something about preferences. Though that price difference may not indicate that the product is any more functional, it means that the product is, indeed, that much more valuable to the buyer for some personal, even broadly unrelatable reason.

So long as enough buyers demand the product at the given price level, with the given features and specifications, there may be no need to make any adjustments, as the target customer expresses his or her preference by voluntarily assigning value to that product.

The product could even be a measly Mercedes-Benz badge retailing for $50,000, and while that would make little sense to the average buyer, so long as there's a willing fool to pay for it, that'll be the price and the nature of the product.

There are plenty of Ferrari owners out there who pay far more for things that the average automobile owner would describe as outrageous: namely, the relatively high costs of maintenance, repairs and insurance. What's more, the average Ferrari owner even goes out of his way to avoid putting miles on his car, which renders the vehicle even less functional than an ordinary Honda Civic. Oddly, the average cost of Ferrari ownership over a three-year period, excluding any financing costs, would easily exceed the cost of that brand new Honda Civic.

In total, when a price comparison leaves us flummoxed, it's always in our better interest to investigate its causes rather than to simply dismiss it as absurd. In this sense, we find that purchases — whether a Prada wallet or a pricey automobile — are made on rather emotional bases, as opposed to strictly rigorous, objective criteria.

I personally have a few German vehicles, and I thoroughly enjoy them. I've also recognized that my E39 isn't 3 times as good as my '95 Impala SS, that my F36 isn't necessarily better than my S550 Mustang; however, each of those vehicles has served uniquely specific purposes at particular times to satisfy different circumstantial demands.

Indeed, as goes the subjective theory of value in economics, the market value of any good or service is determined not by the costs incurred to produce it, but rather by the subjective valuations of the market's bidders. Ultimately, all of economics boils down to margins.

In the sense that the Mercedes-Benz is preferred over the cheaper counterpart, and insofar as pricey options are justified by the buyer, one finds that the buyer pays a lot — relative to base price — to get relatively little marginal utility in return, whether puddle lamps, heated and cooled seats, a navigation system, or an illuminated badge on the front grill.

At these margins, buyers express their preference for luxuries, status or exclusivity over an opportunity cost that may even translate to another brand new car in the segment, even one already equipped with those features.

Just as with the apparel market, shoppers have different tastes and demands, even if distinguishable only by some logo or brand name.

Only select shoppers can justify a $5,000 jacket from Versace, while the average person outfits his entire wardrobe on that budget. What's more, that $5,000 jacket from Versace may not even have pockets, while the $99.99 alternative from Carhartt offers pockets, more insulation and superior durability. Ultimately, those buyers are searching for different types of value, different returns per dollar.

Consider television’s Dr. Phil, who acts as a psychologist for guests in front of a live audience. Dr. Phil’s production team requires all of his guests to sign a robust packet of waivers before appearing on the show.

The reason behind this: Dr. Phil is not a licensed psychologist, and he does not perform psychological therapy in any technical sense. His show is exclusively designed for entertainment purposes, in the same sense as Jerry Springer. Perhaps the only difference between the two shows is that the latter is actually honest about what it is, while the former operates under the pretense of something more sophisticated and important.

In comparing valuations, one finds that Dr. Phil averages an annual salary of $79 million, whereas the median clinical psychologist in the United States earns $70,580 per year, according to the U.S. Bureau of Labor Statistics.

While the earnings disparity may appear unjustifiable at face value, given the purported nature of the two services, one must distinguish between their forms.

While Dr. Phil produces the illusion of psychological counseling, he is actually conducting himself as nothing other than an entertainer.

While an appointment with the average clinical psychologist would invariably prove more psychologically productive for the guest than a visit with Dr. Phil in front of his disruptive audience, the latter serves as a wholly distinct service, wherein entertainment supersedes psychological counseling.

Realistically, the unwitting audience members revel in the drama, in witnessing Dr. Phil humiliate his guests; they’re not interested in logical discourse or clinical psychological discovery, as it would be largely free of the kind of drama that appeals to the average viewer and supports the show’s ratings. Additionally, the average guest is likely interested in something other than effective counseling: some time under the spotlight, perhaps.

Ultimately, while an expense, a production, or any decision for that matter, may appear irresponsible or wasteful from one's narrow perspective, he may simply possess insufficient information to draw a reliable conclusion.

Put another way, is it categorically "wrong" for someone to prioritize fashion over function, aesthetics over comfort, entertainment over learning?

Whether one leans one way or the other, the average person tends toward some combination, and there is plainly no "wrong" way.

Insofar as the market rejects any good or service, perhaps one devoid of a backup camera, clinical validity or something of the like, the enterprise will either adjust accordingly or pay the consequence through reduced sales volume that renders the product obsolete or, otherwise, an expensive artifact on their sales floor.


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