2.1.6

Information Gaps

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Information Needed for Decision-Making

Purchases are based on a belief that a particular good or service will provide satisfaction. These beliefs are based on information. So, information is very important for purchase decision-making.

What is asymmetric information?

What is asymmetric information?

  • A situation of asymmetric information happens when both parties in a transaction have an unequal amount of information.
  • Asymmetric information can cause a decline in prices or quantity of products sold.
The 'Lemons' problem

The 'Lemons' problem

  • Consider Marvin, who is buying a used car from a dealership.
  • The car could either be a 'lemon', which is a defective vehicle, or a high quality vehicle. Because of asymmetric information, Marvin does not know which the car is.
    • This is called a misallocation of resources.
  • This limits his ability to make a rational choice and pay the appropriate price for the car.

Implications of Imperfect Information

Imperfect information can discourage buyers and sellers from participating in the market.

Thin and thick markets

Thin and thick markets

  • If buyers and sellers are discouraged from participating in the market, there will be fewer active in the market.
  • This is a thin market.
  • If there are many buyers and sellers, it's called a thick market.
Price signalling

Price signalling

  • Buyers with imperfect information often think that price signals product quality.
    • E.g A Michelin-starred restaurant selling expensive food is often assumed to be of better quality than a cheaper alternative, like McDonalds.
  • When buyers use market price to make assumptions about quality, markets can struggle to reach an equilibrium price and quantity.

Merit and Demerit Goods - Imperfect Information

Imperfect information is when buyers and sellers have unequal information. It can lead to the over and under consumption of goods in the free market.

Merit goods

Merit goods

  • Consumers take into account only the private benefit.
  • If they had perfect information, they might realise the additional benefits a merit good can bring.
    • E.g they may realise how beneficial education is.
Demerit goods

Demerit goods

  • Consumers only realise the private gain.
  • If they had perfect information, they might realise the negative effects consumption of the good can bring.
    • E.g consumers may not realise the effect smoking can have due to imperfect information.
Jump to other topics
1

Introduction to Markets

1.1

Nature of Economics

1.1.1Economics as a Social Science1.1.2Positive & Normative Economic Statements1.1.3The Economic Problem1.1.4Resources1.1.5Production Possibility Frontiers1.1.6Specialisation & Division of Labour1.1.7Types of Economies1.1.8End of Topic Test - Nature of Economics1.1.9Application Questions - Nature of Economics
1.2

How Markets Work

1.2.1Rational Decision Making1.2.2Demand1.2.3Elasticities of Demand1.2.4Elasticities of Demand 21.2.5Elasticity & Revenue1.2.6Supply1.2.7Elasticity of Supply1.2.8Price Determination1.2.9Price Mechanism1.2.10Consumer & Producer Surplus1.2.11Indirect Taxes & Subsidies1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?1.2.13Alternative View of Consumer Behaviour1.2.14End of Topic Test - Markets1.2.15A-A* (AO3/4) - Markets
2

Market Failure

2.1

Market Failure

2.1.1Types of Market Failure2.1.2Externalities2.1.3The Deadweight Welfare Loss of Externalities2.1.4A-A* (AO3/4) - The Externalities of Education2.1.5Public Goods2.1.6Information Gaps2.1.7End of Topic Test - Market Failure2.1.8Application Questions - Market Failure
2.2

Government Intervention

2.2.1Government Intervention in Markets2.2.2Subsidies & Price Controls2.2.3Pollution Permits & Regulation2.2.4A-A* (AO3/4) - European Emissions Trading2.2.5State Provision & Information Provision2.2.6Government Failure2.2.7End of Topic Test - Government Intervention2.2.8A-A* (AO3/4) - Government Intervention
3

The UK Macroeconomy

3.1

Measures of Economic Performance

3.1.1Measuring Economic Growth3.1.2National Income Data3.1.3Inflation3.1.4Causes of Inflation3.1.5Consequences of Inflation3.1.6Employment & Unemployment3.1.7Causes & Impact of Unemployment3.1.8A-A* (AO3/4) - Hysteresis3.1.9Balance of Payments3.1.10Current Account Deficit & Imbalances3.1.11End of Topic Test - Economic Performance3.1.12Application Questions Macroeconomy
3.2

Aggregate Demand

3.2.1Aggregate Demand3.2.2Consumption3.2.3Investment3.2.4Government Expenditure3.2.5Net Trade3.2.6End of Topic Test - Aggregated Demand3.2.7Application Questions - AD
3.3

Aggregate Supply

3.3.1Aggregate Supply3.3.2End of Topic Test - Aggregated Supply3.3.3A-A* (AO3/4) -Aggregate Supply
3.4

National Income

3.4.1National Income3.4.2Injections & Withdrawals3.4.3Equilibrium Level of Real National Output3.4.4Multiplier Effect3.4.5End of Topic Test - National Income3.4.6Application Questions - National Income
3.5

Economic Growth

3.5.1Causes of Economic Growth3.5.2Output Gaps3.5.3Business Cycle3.5.4Impact of Economic Growth3.5.5End of Topic Test - Economic Growth3.5.6A-A* (AO3/4) - Growth
4

The UK Economy - Policies

4.1

Macroeconomic Objectives & Policies

4.1.1Possible Objectives4.1.2Demand-Side Policies - Monetary4.1.3Demand-Side Policies - Monetary 24.1.4A-A* (AO3/4) - The Future of Interest Rates4.1.5Demand-Side Policies - Fiscal4.1.6Demand-Side Policies in 2007-084.1.7Strengths & Weaknesses of Demand Side4.1.8Supply-Side Policies4.1.9Supply-Side Policies 24.1.10Conflicts Between Objectives4.1.11A-A* (AO3/4) - Conflicting Incentives4.1.12Phillips Curve4.1.13End of Topic Topic - Policies & Objectives4.1.14Application Questions - UK Policies
5

Business Behaviour

5.1

Business Growth

5.1.1Size & Types of Firms5.1.2Business Growth5.1.3Pros & Cons of External Expansion5.1.4Demergers5.1.5End of Topic Test - Business Growth5.1.6A-A* (AO3/4) - Business Growth
5.2

Business Objectives

5.2.1Business Objectives5.2.2End of Topic Test - Business Objectives5.2.3Application Questions - Business Objectives
5.3

Revenues, Costs & Profits

5.3.1Revenue5.3.2Costs5.3.3Economies & Diseconomies of Scale5.3.4Profits5.3.5Profits 25.3.6End of Topic Test - Revenue, Costs & Profits5.3.7A-A* (AO3/4) - Revenue, Costs & Profit
6

Market Structures

6.1

Market Structures

6.1.1Efficiency6.1.2Perfect Competition6.1.3Perfect Competition 26.1.4Monopolistic Competition6.1.5Oligopolies6.1.6The Prisoner's Dilemma6.1.7Collusion in Oligopolistic Markets6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?6.1.9Monopolies6.1.10Price Discrimination6.1.11Monopsony6.1.12A-A* (AO3/4) - Models in Economics6.1.13Contestability6.1.14Benefits of Contestability6.1.15End of Topic Test - Market Structures6.1.16Application Questions - Market Structures6.1.17A-A* (AO3/4) - Cereal Collusion
6.2

Labour Market

6.2.1Demand for Labour6.2.2Supply of Labour6.2.3Labour Market Imperfections6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?6.2.6Wage Determination6.2.7Elasticity of Labour Supply & Demand6.2.8Intervention in Setting Wages6.2.9End of Topic Test - Labour Market6.2.10A-A* (AO3/4) - Labour Markets
6.3

Government Intervention

6.3.1Reasons for Government Intervention6.3.2Government Promotion of Competition6.3.3Usefulness of Competition Policy & Examples6.3.4A-A* (AO3/4) - Modern Competition Policy6.3.5Privatisation6.3.6Government Regulation6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation6.3.8Government Protection of Suppliers and Employees6.3.9Impact of Government Intervention6.3.10End of Topic Test - Government Intervention6.3.11Application Questions - Government Intervention
7

A Global Perspective

7.1

International Economics - Globalisation & Trade

7.1.1Globalisation7.1.2Globalisation for LEDCs7.1.3Globalisation for MEDCs7.1.4Specialisation & Trade7.1.5Pattern of Trade7.1.6Terms of Trade7.1.7Trading Blocs7.1.8UK, EU & WTO7.1.9End of Topic Test - Globalisation & Trade7.1.10A-A* (AO3/4) - Globalisation & Trade
7.2

International Economics - Currency

7.2.1Merged Currency7.2.2Restrictions on Free Trade7.2.3Arguments for Protectionism7.2.4Arguments Against Protectionism7.2.5Balance of Payments7.2.6Balance of Payments 27.2.7Floating Exchange Rates7.2.8Fixed Exchange Rate7.2.9International Competitiveness7.2.10End of Topic Test - International Economy7.2.11Application Questions - International Economics
8

Finance & Inequality

8.1

Poverty & Inequality

8.1.1Absolute & Relative Poverty8.1.2Inequality8.1.3Inequality 28.1.4Lorenz Curve8.1.5Government Policy on Poverty8.1.6End of Topic Test - Poverty & Inequality8.1.7A-A* (AO3/4) - Inequality & Poverty
8.2

Emerging & Developing Economies

8.2.1Measures of Development8.2.2Factors Influencing Growth & Development8.2.3Barriers to Development8.2.4Barriers to Development 28.2.5A-A* (AO3/4) - The Bottom Billion8.2.6Development Strategies8.2.7Interventionist Strategies8.2.8Aid8.2.9International Institutions8.2.10International Institutions 28.2.11End of Topic Test - Emerging & Developing8.2.12Application Questions - Developing Countries
8.3

The Financial Sector

8.3.1Role of Financial Markets8.3.2Market Failure in the Financial Sector8.3.3Role of Central Banks8.3.4End of Topic Test - The Financial Sector8.3.5A-A* (AO3/4) - Financial Sector
8.4

Role of the State in the Macroeconomy

8.4.1Public Expenditure8.4.2Taxation8.4.3Public Sector Finances8.4.4End of Topic Test - Role of the State8.4.5Application Questions - Role of the State
9

Examples of Global Policy

9.1

International Policies

9.1.1Global Debt & Deficit Policies9.1.2Poverty & Inequality Policies9.1.3Changes in Interest Rates9.1.4Competitiveness Policies9.1.5End of Topic Test - International Policies9.1.6A-A* (AO3/4) - International Policies
9.2

Policy Responses to Shocks

9.2.1International Tax Policies9.2.2Problems for Policymakers9.2.3End of Topic Test - Policy Responses9.2.4Application Questions - Policy Responses

Practice questions on Information Gaps

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  1. 1
    Features of asymmetric information:True / false
  2. 2
    What is asymmetric information?Multiple choice
  3. 3
    Which industry is likely to have the biggest problem with information asymmetry?Multiple choice
  4. 4
    Under which condition do buyers often think price signals product quality? Multiple choice
  5. 5
    Which of the following is an example of a potentially under-consumed good in the free market due to imperfect information?Multiple choice
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Public Goods

End of Topic Test - Market Failure