4.1.8.6 - Market Imperfections

Question 1

What are the features of a perfect market

Answer 1

• no barriers to entry and exit: economic agents can enter and leave the market easily without incurring costs
• perfect information: all economic agents inn the market know everything they need to know to make a fully informed decision
• homogenous products and factors of production: all firms in the market are selling identical goods, made with identical resources
• large numbers of buyers and sellers
• perfect mobility of factors of production: if factors of production cannot move quickly and easily between uses or occupations, the market will not reach equilibrium

Question 2

Why do market imperfections exist

Answer 2

• The features of a perfect market are unrealistic as demand and supply diagrams are just used as models.
• real-life markets tend to have a range of imperfections

Question 3

What is imperfect and asymmetric information

Answer 3

• Imperfect info: when economic agents don’t know everything they need to know in order to make a fully informed decision
• asymmetric info: a source of information failure were an economic agent knows more than another, giving them more power in a market transaction

Question 4

What are sources of imperfect information

Answer 4

• information is presented in a way to exclude some people and be meaningful to others
• there can be costs involved in acquiring info which deters people from doing so

All of which lead to an imbalance of power where one part can exploit others

Question 5

What is a monopoly

Answer 5

An extreme example of a market structure meaning only one firm supplies a market. In a free market a monopoly producer has no incentive to be economically efficient as they have no competition
- customers will therefore not benefit from the lowest prices or have a choice of products so the market favoured leads to productive in efficiency and a reduced choice pf products for consumers
- many consumers may not be able to purchase the products as the firms have no incentive to put their prices down

Question 6

What is immobility of factors of production

Answer 6

When factors of production cannot be perfectly mobile between different uses or occupation
- occupational immobility or geographical immobility are the tow causes for this

Question 7

What is occupational immobility

Answer 7

A source of factor immobility meaning workers find it difficult to move between occupations due to the lack of desirable skills,
- this could be due to a lack of training or incorrect levels of education

Question 8

What is geographical immobility

Answer 8

A source of factor immobility meaning workers have difficulty moving locations for work
- this could be due to a lack of affordable housing in the new area that they need to be

Question 9

What is an inequitable distribution of income and wealth

Answer 9

When the way in which income and wealth is distributed in society id considered unfair
- with no gov intervention, the people with the greatest ability to pay will have the greatest share of resources
- some economists will argue that inequity creates useful incentives among economic agents and can potentially have a positive impact overall