Quantization is the process of converting an infinite number of possibilities to a finite number of conditions. Analog signal is smooth and continuous, it represents infinite number of actual voltage levels and practically it is not possible to convert all analog samples to a precise proportional binary number. Figure shows the voltage range of 0-15V so there are total 16 levels. Here if analog input is 8V, its binary equivalent is 1000. But if analog input is 11.7 as shown in figure, then the approximate value i.e. 12 V will produce binary value 1100.
Now, .3V variation is known as Quantization error. Each sample voltage is rounded off (Quantized) to closest available level and then converted to its correspondence PCM code. The PAM signal in the transmitter is essentially the same PAM signal produced in the receiver. So any round off errors in the transmitted signal are reproduced when code is converted back to analog in the receiver. The error is called quantization error (Qe). The quantization error is called quantization noise (Qn).