Market Imperfections

What is perfect information?

When buyers and sellers both have full and accurate information.

What is symmetric information?

When buyers and sellers have the same level of information.

What is imperfect (asymmetric) information?

When one side (buyer or seller) has more or better information than the other.

Why does imperfect information cause market failure?

Because people make wrong decisions, so resources are not used efficiently.

What happens to output with imperfect information?

Goods may be:

• Over-produced (too much)

• Under-produced (too little)

What would happen if consumers knew all risks?

• Harmful goods → demand falls

• Beneficial goods → demand rises

Key idea to remember for exams?

Imperfect information → wrong decisions → misallocation of resources

What is market power?

The ability of a firm to control price and output.

What is a monopoly?

A market with one firm (or a firm with strong control).

Why can monopolies charge high prices?

Because there is little or no competition.

What are barriers to entry?

Obstacles that stop new firms entering the market.

Why are monopolies inefficient?

They:

• Produce less output

• Charge higher prices

What is the result of monopoly power?

• Higher prices

• Lower output

• Reduced consumer welfare
  → Market failure

What is factor mobility?

How easily factors of production can move or change use.

What are the factors of production?

Land, labour, capital, enterprise.

What is factor immobility?

When factors cannot easily move or be re-used.

Why does factor immobility cause market failure?

Because resources can’t move to where they are needed, causing inefficiency.

What happens if demand changes but factors are immobile?

The market adjusts slowly → misallocation of resources

What is labour immobility?

Workers cannot easily move jobs or locations.