1.3.4: Information Gaps

Question 1

When does symmetric information occur?

Answer 1

• When buyers and sellers have potential access to the same information.

Question 2

What is asymmetric information?

Answer 2

• When one party has superior knowledge compared to another
• eg the seller has more information that buyer, resulting in the seller potentially charging higher prices

Question 3

How does advertising lead to information gaps?

Answer 3

• As advertising is designed to change attitudes of the consumers to encourage them to buy the good
• However, technological advancements helps to reduce information gaps, as people have access to more information

Question 4

How do information gaps lead to market failure?

Answer 4

• As information gaps leads to the misallocation of resources, as people do not buy things that maximise their welfare.
• This means that consumer demand for a good or produced supply of a good may be too high or too low.
• Therefore price and quantity are not at the social optimum position and economic agents are unable to make rational decisions due to the info gap.