Microeconomics - Market Imperfections

Question 1

Symmetric information

Answer 1

consumers and producers have perfect market
information to make their decision. This leads to an efficient allocation of resources.

Question 2

Asymmetric information

Answer 2

leads to market failure. This is when there is unequal
knowledge between consumers and producers

Question 3

imperfect information

Answer 3

There could also be imperfect information, where information is missing, so an
informed decision cannot be made.This leads to a misallocation of resources. Consumers might pay too much or too
little, and firms might produce the incorrect amount. For example, monopolies might
exploit the consumer by charging them more than they need to.

Question 4

Immobility of the factors of production

Answer 4

The mobility of Labour is the ability of workers to change between jobs.
Unemployment is evidence that labour markets do not work efficiently.

Question 5

frictional unemployment

Answer 5

Frictional unemployment may exist whilst people move between jobs and search for
new ones.

Question 6

structural unemployment

Answer 6

Structural unemployment occurs when there is a decline in an industry. This can
mean worker skills do not match the location and skills required for the job. This is
more serious.

Question 7

geographical immobility

Answer 7

n refers to the obstacles
which prevent the factors of production moving between areas. For example, 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 8

Monopoly and monopoly power

Answer 8

The basic model of monopoly suggests that higher prices and profits and inefficiency
may result in a misallocation of resources compared to the outcome in a competitive
market

Monopolies could exploit the consumer by charging them higher prices. This means the good is under-consumed, so consumer needs and wants are not fully met.

This loss of allocative efficiency is a form of market failure.

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.