ABSTRACT

The preceding seemingly disparate phenomena are in fact all consequences of the law of demand. Suppose there is some cost, for example, transportation, that increases the price of two varieties of a good by the same amount, irrespective of the quality or other attribute of the good. Transportation costs must be incurred before most goods are consumed; these costs often depend only on attributes of weight and volume that are unrelated to the quality or price of the good itself. Individuals seek ways to

mitigate the damages to their incomes because of transportation and like costs. One way to do this is to pack as much of the desirable attributes of a good into the good as practical. For example, people enjoy various aspects of apples-taste, crunchiness, tartness, etc. Good apples have more of these pleasing attributes than poor apples. It costs the same to transport a mediocre apple of a given weight as a good apple. By shipping only good apples, more good attributes are transported for the same cost than would be if only bad apples were shipped. Thus in a real sense the cost of transportation (of attributes of apples) is lowered, if the high-quality apples rather than the low-quality apples are transported. Thus shipping good apples reduces the severity of the constraint on consumption imposed by transportation costs and is thus the behavior which is most commonly observed. The same logic applies to the wine and clothing examples mentioned above. It costs the same amount to ship a poor-grade bottle of wine as a high-grade bottle from France to North America. However, more of what people want in a bottle of wine gets shipped per bottle if the good rather than the poor wine is shipped. Thus only the relatively better grades wind up in the U.S. and elsewhere.