Recently, I was on the Panasonic website and came across this camera. When looking at it I noticed it had 12.1 megapixels, which is really low compared to cheaper cameras. So why is the megapixels so low on this camera and what does lowering the megapixels do to a camera's image? One thing I do know is lowering the megapixels give the image more sharpness, but I have no idea what that means.
The cost of a sensor is not determined by the pixel count. We can put a 41mp sensor in a 10.67x8mm chip (as used in the Nokia PureView smartphone) but you won't find a 370Mp full-frame camera in the shops, which is what the same density of pixels would be on a full-frame sensor... The costs of sensors are dictated by other factors which determine the sensitivity of those pixels such as the fabrication 'process' size and the physical size of the sensor chip.
Larger sensors tend to produce better quality images but cost more money as fewer sensor chips can be produced from a wafer and also minor imperfections which can occur have a greater impact (see What limits the size of digital imaging sensors? as MichaelT's answer is excellent.) Using a smaller process size means more of the chip surface can be dedicated to catching photons, but each 'iteration' is more expensive to work with.
This difference can be seen in the specifications too, I've taken two 16Mp Panasonic cameras pretty much at random and compared them on dpreview we get...
...and in this selection the specs all looks pretty similar apart from the sensor size and the price tag. But once we factor in how this affects the image performance of the camera we find that the GF7 has an additional 2 stops of sensitivity so it is able to capture a much wider range of tones accurately. Essentially the sensor is larger and the output is better in every way we can measure.
With a better sensor, manufacturers start to include other features to go with it and there the two cameras become radically different - for example the GF7 can take many more shots per second, it saves high-quality raw files, the fastest shutter speed for freezing action is 3-stops faster, it offers more control over how the shot is taken through metering modes and the list of features available only grows from there and each feature adds costs to the build of the camera.
We could do the same with other cameras like the Nikon D4/D810 where the D4 is double the price for 1/2 the pixels, but the story is similar there - the D4 can take pictures in exceptionally low light and the shutter mechanism is engineered and built for constant use - all day, every day.
TL;DR Aside from a spot of willy-waving the megapixel race was for the most part over a long time ago. You have to look at a camera as a whole system before you can appreciate how good a camera is and why it might be more expensive.
Price and megapixels are not related. There are small compact cameras with 20 MP such as the Nikon L32 which goes for less than $100 USD and full-frame ones which have only 12 MP such as the Sony A7S II which costs $3000 USD. For a given sensor-size though, more megapixels require smaller pixels which by the simply laws of physics gather less light. Less light means more noise which diminishes image-quality.
For this reason, manufacturers often offer slightly lower resolution on premium models and sometimes have introduced a newer model with fewer megapixels to improve image-quality. Panasonic, Canon and Nikon have all done this at some point in their premium compact. The top compact from Panasonic is the LX100 which captures 12 MP (from a larger 16 MP sensor actually) while their low-end FZ40 has 20 MP.
The common fallacy is to equate image-quality and megapixels. Professionals know the value of megapixels is the print sizes they allow. More megapixels means larger prints are possible but there are advantages to fewer megapixels:
- Lower image-noise. Sensor-size dominates low light performance but at equal sizes, fewer pixels are better. Look at the 42 MP Sony A7R II vs the 12 MP Sony A7S II which are almost identical except that the lower resolution A7S II can shoot at ISO 409,600 vs 102,400 for the A7R II.
- Lower resolution equals less data to read off the sensor. This lets a camera shoot continuously faster and for longer. A 16 MP Nikon D4X shoots at 11 FPS vs a 36 MP Nikon D810 which reaches 5 FPS.
- Better dynamic-range. This really is in direct relation to pixel-size.
More expensive cameras don't always have fewer megapixels. In fact, more often than not, the cameras with the highest megapixel count are often fairly expensive when compared to cameras with a lower megapixel count and similar features. The camera you have referenced has a lot of features not directly related to sensor design that contribute to its price. It seems to be primarily intended as a video camera with enough resolution to use frame grabs as still photos. And the $600 price tag pales in comparison to the 50MP Canon 5Ds that lists for $3,700 without a lens!