The Price Isn’t Always Right

How much are you willing to pay for a pair of athletic shoes, a new phone, or the latest video game? We all make decisions about spending, and the companies that sell us products often follow what we as consumers tell them. If we think the price for an item is too high, we won’t purchase it, and the price will probably come down. If one company can sell products for a lower price than others, then they all have to sell their products for a lower price to stay competitive.

Prices can also change from one place to another. Imagine you are on vacation in New York City from Cincinnati, Ohio. If you want to buy a bottle of water while strolling through Central Park, you may be in for a shock. The same brand of bottled water you buy at home may cost twice as much in New York City.

Travel to another country, and the difference in price can be even greater. Go to a store in Germany to buy a garden hose, and you’ll soon realize you’re not at a hardware store in Kansas. In Germany, each part is sold separately. You’ll have to select from a set of hoses, each more or less expensive, with the difference in price based on factors such as how thick or long or sturdy the garden hose is. And you’ll have to pay extra for parts like the nozzle that screws onto the hose. Once you’ve found all the parts you need, you could end up spending between $65 and $120 for your new garden hose!

If you go to a store in the United States to buy a garden hose, the prices will also vary, but the parts will probably come attached. There will still be a wide price range, but all the prices—from the cheapest to the most expensive—will be much lower. You’ll probably spend between $10 and $40. What accounts for this difference? Two of the biggest factors are sales taxes versus value-added taxes, and perceived value.

In the United States, states need to make money to help pay for the services they provide. So they charge taxes on items sold. This is called sales tax, and is usually around 7 percent of the original cost. If the sales tax is 7 percent, and a garden hose costs $10, then you’ll have to pay $10.70 for the hose.

One of Germany's fiscal policies is to collect taxes in many stages during the production of items. This is called value-added tax. The makers of raw materials such as rubber sell their materials to hose manufacturers, and they pay 19 percent of what they make to the government. Hose manufacturers sell their items to retail shops like hardware stores. They also pay 19 percent of what they make to the government, minus the taxes the raw material makers have already paid. The retail stores sell the hoses to people like you, and they pay 19 percent to the government, minus the taxes the raw material makers and manufacturers have already paid. These extra costs to businesses get passed along to the consumer in the form of higher prices.

Even with different tax costs, however, sometimes the difference in price between two places is hard to explain. It fluctuates slightly, but the price a store in Germany asks for a garden hose is probably higher than the price a store in the United States asks. The price a consumer is willing to pay for a garden hose—its “perceived value”—is a lot higher in Germany than in the United States. People in Germany just think a garden hose is worth more than do people in the United States.

Most consumers look for the best quality item for the lowest possible price. The price they’re willing to pay is influenced by many factors, such as how much they earn at work, how much they need the item, and how much they pay for necessities such as food, clothing, and housing. These factors change so much from one place to another that it’s no wonder prices vary, too.

This price variance could soon be changing, however. As more people gain Internet access, they’re researching item prices in other countries. Slowly but surely, the demand for cheaper garden hoses is spreading throughout Germany, and the phrase “getting hosed” no longer has two meanings.

Part A

How does the author develop the central idea that the reasons for price variance can depend on emotions as well as logic?

The author goes into factors such as consumer earnings and the price of necessities.

The author analyzes two different systems of taxation.

The author discusses the influence of perceived value.

The author says that over time, prices for garden hoses are falling in Germany.

Part B

Which sentence from the text develops the central idea?

"One of Germany's...policies is to collect taxes in many stages during the production of items."

"As more people gain Internet access, they’re researching item prices in other countries."

"People in Germany just think a garden hose is worth more than do people in the United States."

"These extra costs to businesses get passed along to the consumer in the form of higher prices."