4.1.8.6 market imperfections

Question 1

what is symmetric information?

Answer 1

• means that consumers and producers have perfect market information to make their decision
• this leads to an efficient allocation of resources

Question 2

what is asymmetric information?

Answer 2

• leads to market failure
• this is when there is unequal knowledge between consumers and producers
• this could lead to a misallocation of resources
• consumers can also know more info than the producer, such as when purchasing insurance policies

Question 3

what is imperfect information?

Answer 3

• where information is missing, so an informed decision cannot be made
• this leads to a misalloaction of resources
• consumers might pay too much or too little, and firms might produce the incorrect amount

Question 4

asymmetric information can be linked with the principal-agent problem
what is this?

Answer 4

• this is when the agent makes decisions for the principal
• but the agent is inclined to act in their own interests, rather than those of the principal
• managers might choose to make a personal gain, rather than maximise the dividends of the shareholders

Question 5

how can info be more widely available?

Answer 5

more widely available through advertising or government intervention

eg) the harmful effects of smoking could be made public through adverts and messages on cigarette boxes

Question 6

what is the mobility of labour?

Answer 6

• the ability of works to change between jobs
• unemployment is evidence that labour markets don’t work efficiently

Question 7

when does frictional unemployment exist?

Answer 7

may exist whilst ppl move between jobs and search for new ones

Question 8

when does structural unemployment occur?

Answer 8

• when there’s a decline in an industry
• this can mean worker skills don’t match the location and skills required for the job

Question 9

what does the geographical immobility of the factors of production refer to?

Answer 9

refers to the obstacles which prevent the factors of production moving between areas

eg) labour might find it hard to find work due to family and social ties, the financial costs involved with moving, imperfect market knowledge on work and the regional variations in house prices and living costs across the UK

Question 10

what does the occupational immobility of the factors of production refer to?

Answer 10

• refers to the obstacles which prevent the factors of production changing their use

eg) labour might find it difficult to change the occupation
-> this occurred in the UK with the collapse of the mining industry, when workers didn’t have transferable skills to find other work
-> this causes include insufficient education, training and skills

Question 11

what does the basic model of monopoly suggest?

Answer 11

that higher prices and profits and inefficiency may result in a misallocation of resources compared to the outcome in a competitive market

Question 12

how can monopolies exploit the consumer?
what does this mean?

Answer 12

• by charging them higher prices
• this means the good is under-consumed, so consumer needs and wanted are not fully met
• this loss of allocative efficiency is a form of market failure

Question 13

why do monopolies have no incentive to become more efficient

Answer 13

• monopolies have no incentive to become more efficient, because they have few or no competitors, so production costs are high
• there is a loss of consumer surplus and a gain of producer surplus