In: Economics
Explain the quantity-quality tradeoff. Why is it important to economic development? Be sure to discuss the family-level motivations that lead parents to substitute quality for quantity. Also be sure to discuss the macroeconomic, aggregate implications of these family-level decisions. Illustrate your ideas with a discussion of the Cobb–Douglas economic growth model.
The quality-quantity tradeoff refers to the amount of quantity of a good that increases or decreases with respect to the increase of decrease in the quality or quantity of that particular commodity. This means that a consumer needs to be willing to sacrifice a (unit) product or a service in order to acquire another one with the amount of resources remaining the same.
Quality- Quantity trade off is important for economic development as during the tradeoff the economy adjusts itself in order to achieve the best possible allocation of resources for the production of a set of chosen goods. This leads to comparitive advantage, efficiency in production, maximum utility and optimal utilisation of resources and increased welfare, which in turn lead to economic development.
At a family-level, parents try to substitute quality for quantity as it is better to have good quality products that have higher per unit utility as compared to sub-standard goods. More of it does not necessarily mean more utility as the law of diminishing marginal utility is at play. For example, consider two different grades of milk (grade I and grade II). Assume grade A has high nutritional value and grade B is of low nutritional value. The price of grade I milk is more than that of grade II milk. At a family-level, parents would try to maximise the utility per unit of product than get more of the same product at a cheaper rate.
At a macroeconomic level, a collection of choices of preferences of all the families in a particular nation reveals the consumer behaviour patterns, which is an ideal statistic necessary to frame economic policies and ascertain to some level the movement of the market. This allows a nation to alter its production possibilites in order to achieve maximum utility and production efficiency. The quality-quantity tradeoff also leads to changes in the aggregate demand for a particular product as income levels rise and fall due to changes taking place in the economy. The trade off at a family level when taken as an aggregate influences the marginal rate of technical substitution and leads to comparitive advantage and specialization. This influences the gains from trade.
Cobb douglas model
In the graphs above, take graph I with just the indifference curves measuring the utility at different combinations of grade I and grade II milk. We have three curves U1 , U2 and U3 with U1 having the lowest utility and U3 having the highest utility. One would assume that families would consume at a U3 level as it has the highest utility. This is not true. We shall why in graph II.
In the graph II we have introduced a straight line curve BC representing the budget constraint of a family (families at a collective level). This now brings into question the affordability of the products at different utility levels. At U1 the product us highly affordable as it is to the left of the budget constraint curve, but at this area the utility levels are low. And at U3 the utlilty levels are the highest but it is not affordable. Utlilty maximisation occurs at the point where the Indifference curve U2 meets the budget constraint curve BC. This is the point where there is utility maximisation. This is the point that nations would look at while deciding the level of output of a particular good, price and resource allocation towards production of goods.