<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Analyze the impact of both imperfect information and asymmetric information
  • Evaluate the role of advertisements in creating imperfect information
  • Identify ways to reduce the risk of imperfect information
  • Explain how imperfect information can affect price, quantity, and quality

Consider a purchase that many people make at important times in their lives: buying expensive jewelry. In May 1994, Doree Lynn bought an expensive ring from a jeweler in Washington, D.C., which included an emerald that cost $14,500. Several years later, the emerald fractured. Lynn took it to another jeweler who found that cracks in the emerald had been filled with an epoxy resin. Lynn sued the original jeweler in 1997 for selling her a treated emerald without telling her, and won. The case publicized a number of little-known facts about precious stones. Most emeralds have internal flaws, and so they are soaked in clear oil or an epoxy resin to hide the flaws and make the color more deep and clear. Clear oil can leak out over time, and epoxy resin can discolor with age or heat. However, using clear oil or epoxy to “fill” emeralds is completely legal, as long as it is disclosed.

After Doree Lynn’s lawsuit, the NBC news show “Dateline” bought emeralds at four prominent jewelry stores in New York City in 1997. All the sales clerks at these stores, unaware that they were being recorded on a hidden camera, said the stones were untreated. When the emeralds were tested at a laboratory, however, it was discovered they had all been treated with oil or epoxy. Emeralds are not the only gemstones that are treated. Diamonds, topaz, and tourmaline are also often irradiated to enhance colors. The general rule is that all treatments to gemstones should be revealed, but often disclosure is not made. As such, many buyers face a situation of asymmetric information    , where the both parties involved in an economic transaction have an unequal amount of information (one party knows much more than the other).

Many economic transactions are made in a situation of imperfect information    , where either the buyer, the seller, or both, are less than 100% certain about the qualities of what is being bought and sold. Also, the transaction may be characterized by asymmetric information, in which one party has more information than the other regarding the economic transaction. Let’s begin with some examples of how imperfect information complicates transactions in goods, labor, and financial capital markets . The presence of imperfect information can easily cause a decline in prices or quantities of products sold. However, buyers and sellers also have incentives to create mechanisms that will allow them to make mutually beneficial transactions even in the face of imperfect information.

If you are unclear about the difference between asymmetric information and imperfect information, read the following Clear It Up feature.

What is the difference between imperfect and asymmetric information?

For a market to reach equilibrium    sellers and buyers must have full information about the product’s price and quality. If there is limited information, then buyers and sellers may not be able to transact or will possibly make poor decisions.

Imperfect information refers to the situation where buyers and/or sellers do not have all of the necessary information to make an informed decision about the price or quality of a product. The term imperfect information simply means that not all the information necessary to make an informed decision is known to the buyers and/or sellers. Asymmetric information is the condition where one party, either the buyer or the seller, has more information about the quality or price of the product than the other party. In either case (imperfect or asymmetric information) buyers or sellers need remedies to make more informed decisions.

Questions & Answers

what is facing trade offs
Nancy Reply
It is giving up a commodity to purchase another commodity
The
for example, when we have two commodities like chicken and turkey you can trade off of give up chicken to purchase turkey
The
that can also be called foregone goods
AKINOLA
it like opportunity cost
AKINOLA
what is elastic
Tida Reply
elastic is the change in to price and change in demand
ehtesham
Is the percentage change in quantity demand and quantity supply.
Robert
Or percentage change in price of demand and supply
Robert
Right
ehtesham
Robert Mensah you are explaining elasticity of demand
The
robert i think he talk about elastic releated to elasticity of price a proportionate change in price over qd
Iftikhar
can anyone explain what happrn her i don't understand anything
Brahim
is the percentage change in demand as price change
MUSA
sometimes price is elastic,inelastic
The
price elasticity is different from price being elastic
The
elasticity is not always the percentage change in demand as a result of changes in price. there's income elasticity and cross elasticity so it's not necessarily always price
The
elastic is when a change in price of a commodity results in a relatively a larger proportion change in the quantity demand of the commodity
Nancy
what is inelastic
Tida Reply
price is said to be inelastic when it is less than 1
The
what is national income accounting
Aisha Reply
National income is the income earned by all factors of production..
Majid
So this benefits the workers or the businesses?
Neil
Like whose income are we talking about here
Neil
what is multiplier
Khalid
what is mutual funds
Khalid Reply
it is a combination of financial securities such as treasury bills , bonds etc in one managed by an institution that individuals and firms invest in for profit. it is usually a long term investment and is seen as a low risk investment because the financial instruments invested in, are diversified.
Ekeanyanwu
A mutual fund is a professional managed investment that pools money from many investors to invest.
Malik
could you please recommend me any book to understand game theory
Prtj Reply
Please keep all the conversations in English language to be understandable for all users.
QuizOver Reply
hi..prtj yad..the game theory is different type ..which one you want...the cartles game theory u can read the Johnson mascrehanson book
shaikh
any one can hicson approach
Iftikhar
what is the game theory about
The
hi..iftikhar alam..it's not hicson..it's Hickson theory of labour..
shaikh
oh. the game theory is about Hickson theory of labour
The
I think Game Theory has to do something with companies in Macro-Econ
Neil
Wot
Neil
ok
The
I mean like I don't learn about if until Later, but if you're interested here's a YouTube link: ***youtu.be/PCcVODWm-oY
Neil
Mr.joker ..game theory is not about labour ..it's about who will fix the price of product first in a market ..like a pepsi and cocola compny..but the pepsi producer will wait to fix the price unless the cocola has fixed its price ..aftr that they will fix the price and make discount n all to grab th
shaikh
wats dis ?Neil which link?
shaikh
Oh nvm it censored it -_-
Neil
Go to YouTube and search Crash Course Game Theory. They explain it in less than 20 min
Neil
Sorry Shaikh-ji :P
Neil
sorry for what?
shaikh
ok thank you for explaining
The
my pleasure..joker ji
shaikh
ok thank you for explaining
The
and Neil it's good if you are sharing some new information related to theories ..no need to say sorry..I will also learn
shaikh
its oky shaikh whats it is.,... explain hickson approach while f u till something about marshellion demond
Iftikhar
But it's like. I don't know anything. Check the video out tho
Neil
u guys call me ...vth my name also ..it's my surname shaikh..and k iftikhar u need to know the Hickson theory
shaikh
k..Neil..I understood
shaikh
Then your first name is Farzana?
Neil
Dang I'm so sorry
Neil
mr joker what about the art of advertisement vr to advertise r not like such wd can understand game theory
Iftikhar
That's a cook name :)
Neil
again sorry..what happend dear?
shaikh
Iftikhar ask questions after you've seen the video I'm talking about bro
Neil
*cool name
Neil
I said sorry bc I assumed that your first name was Shaikh
Neil
iftikahr ji..hicksion and marshelion deamnd theory said that the consumer should benefited in minimum cost..like maximum benefit and minimize cost
shaikh
iftikhar..Moreover the hicksion theory on normal goods said that consumer had subtitue goods ..so if commodity is more cheaper than y thn they will go for that..means if coffee bcm expensive so consumer will prefer tea..so maximum benefit and minimize cost
shaikh
But how can that be true tho? Np me benefits by spending less. You know like Normative and Inferior goods? Is this why it's a Theory? And I think it's spelled Marshelion Demand Theory.
Neil
That theory just don't make no sense
Neil
Oh I see. Wait so Hicksion Theory = Marshelion Theory?
Neil
but dear if the cheaper good has a utility for the consumer then he will buy na
shaikh
*no one benefits by spending less
Neil
Oh Ok
Neil
Wow this is interesting
Neil
Neil .. I thought u reaaly dnt wnt that I will stay here..
shaikh
I've been saying the exact opposite of that Farzana. You've just misunderstood. I think your knowledge of Econ is amazing and its beneficial for you to stay.
Neil
Wait should we call you Ms. Shaikh or Farzana is fine?
Neil
oh thnx Neil ..sry I hv misunderstood to you? and I hope now I'm texting in English..that everybody can understand
shaikh
and whatever u want to Cal..u can..
shaikh
Thnx Farzana 😁
Neil
yeah..my pleasure dear
shaikh
who said hickson = marshelion theory
Iftikhar
yes farzana you have now began talking just be confined in English
Francis
hope you don't have any issue to if I say dear..coz im used to say to my students dear
shaikh
oh ..thanx..francis
shaikh
Hey np
Neil
oh..thnx neil
shaikh
what are the releation beyond them
Iftikhar
ifitikahr u need to know the relation between Hickson and marshellion
shaikh
yah shaikh and whats the second name of hickson and marshelion
Iftikhar
neil whats the second name of hickson and marshellion theory
Iftikhar
2nd name?
Neil
Their both Theories? Is that watchu asking?
Neil
ok..iftikhar Il mak simple this for u...wait ..and my name is farzana
shaikh
iftikhar. its other name is ..hicksion demand function or marshelion its added coz the marshelion has developed this theroy more
shaikh
So, it is called Marshelion Demand Theory AS WELL AS Hicksion Demand Theory
Neil
hi..I'm kashf here I'm an economic professor..
shaikh Reply
an equilibrium price is a stable price and therefore be allowed to stay discuss
Berty
we got equilibrium when the demand and supply will b equal at that point v get equal price..and break even point
shaikh
can you tell me something about economics?
Asrar
hi sheikh can you help me out with this question? Q: Explain the market you think should be stable in the market economy regardless of the economic, social, political and legal changes. thanks
Angela
just Neil ..ask about scale of preference..so it is the nly tool in economics which show the real demand if certain goods in market
shaikh
Angela u ask . that regardless of certain aspects..yes they also possible..but in a.."lazzies fair " economy means market or economy without govt interferenc
shaikh
so..asrar..basically economics is a dept to administrate the money dept of country..as weather k liy weather dept.. the moneyflows in the country ..how they circulate I'm a market ..and how to Deal vth the problems of scarcity means shortage of good in a market ..economics teaches us
shaikh
thanks shaikh. explain the difference between productivity and quality. give one example to support your discussion.
Angela
first tell me what u understand about ..productivity and quality
shaikh
what bc?
shaikh
I don't know y you r saying like this..cz I don't know the member of this group ..coz I join today nly..bt I felt ..tht u guys don't like that I shd b in this group..
shaikh
what is AF?
shaikh
who is the father of Economics
Francis
do u have English letrature Francis .where r u from?
shaikh
Adam Smith is the father of modern economic
Ankit
Adam Smith
Audrey
Adam Smith is the father of ecobomics
shaikh
and Alferd Marshall developed the economics in his book ..."wealth of nation" in 1939
shaikh
Francis .now you got the answer
shaikh
yes
Ben
please , anyone can explain the elasticity of demand and their types and also it's use
Ankit
elasticity of demand means changes in demand due to change in its factor
Sheetal
hey Ankit...the responsive cahnge in deamnd of commodity due to change the price of commodity ..said elasticity of demand.. the types of elasticity demand..are as follows price elasticity income elaaticity cross elasticity promotional elasticity
shaikh
the price elasticity has four types .. relatively elastic unitary elastic perfectly elastic perfectly inelastic
shaikh
explain isoquilant?
Suprim Reply
what is all about isoquilant
Francis
 isoquant  curve is a contour line which joins together the different combinations of two factors of production that are just physically able to produce a given quantity of a particular good.
ehtesham
isoquant not isoquilant
Carl
what is economic growth and development?
ambe
ehtesham
The
isoquant is a curve that shows the different combinations of two commodities purchased by a consumer
The
isocost deals with cost I.e the cost of producing commodities. it only includes two factors of production which is capital and labour in a long run. isocost shows the different combinations of factors of production that a firm employs for the production of goods
The
hi
shaikh
hi..I'm new here...I'm an economic professor
shaikh
is gst good for a country ..as india is underdeveloped country
shaikh
@shaikh farzana👍
faraz
yes say ..mr.farza wassan
shaikh
I mean faraz
shaikh
gst is good for the country, bcoz it is a good source of earning revenue, but it is not good for the general public, bcoz they are the once who suffers the most.
faraz
Economic growth is the increase in the total output of a country and Economic development is the rise in the level of production due to advancement in technology and the equitable distribution of resources to raise standard of living
The
Shaikh frazana Really you are prof...
ehtesham
one's*
faraz
k
shaikh
yes ...ehtasham ...I'm an professor in degree college in Navi Mumbai ..y so?
shaikh
oh you from india
ehtesham
do u hv doubt?
shaikh
so..whr r u from?
shaikh
last 3years I was in this profession
shaikh
Pakistan
ehtesham
oh ..nyc..
shaikh
aap kB se is aap ki use or rhe h..kyuki hum bhut bar is pr reply krte h .pr show nai krta aaj phli bar Mera qtn send hua
shaikh
main ny kal s start kea hay
ehtesham
oh..kaise add hote h muje samj he nai aarha tha..and is pr Mera nam b show nai kr rha tha..na he mere qtn send hote h
shaikh
ap ye batain unemployment py inflation ka kia effect hota hay
ehtesham
unemployment kay effect ko explain krain
ehtesham
ok
shaikh
unemployment and inflation can b explain by bndwangon theroy
shaikh
?
ehtesham
means ...higher the unemployment ..higher the inflation ...inflation occur when a country has deficit in bop ..so they get so much credit from other country and bcm indebtness of other country ..so to pay other country's debt ..they couldn't fetch Thier country by offering salary so..they bcm unempl
shaikh
they raised the prices of general goods ..and apply so many taxes on people's goods to recover the amount of deficit..so inflation increases..when inflation increases the unemployment also increases means ..how much the person earn Thier real income would b low for him as against inflation..
shaikh
Thier purchasing power capacity would b low..
shaikh
yes The?
ehtesham
Yes The joker?
ehtesham
what u say joker to me ?
shaikh
nain ap ko nain kaha
ehtesham
Is aap pr quiz discuss hote h ..or aap Yaha battamizi kr rhe h
shaikh
5th reply main es name sy kesi ny answer dea hay os ki id ka name the joker hay
ehtesham
ye app bht slow hay
ehtesham
i will complaint in this app holder ..cz it's not in the policy..n I'm leaving this app now?
shaikh
wesy main ko nain kaha
ehtesham
by everyone
shaikh
okay as you wish by bay
ehtesham
I'm not talking to u
shaikh
i do not know what you think but i was not say you
ehtesham
hi
The
hi bro
ehtesham
what were you guys saying about me
The
ooooooooh OK neil
david
what is scale of preference ?
david
can someone please explain that to me?
david
it is a list of wants arranged in order of relative importance
The
if resources were abundant there will be no need to study economics discuss
Berty
explain the market you think should be stable in the market economy regardless of the economic, social, political and legal changes.
Angela
The objection of economist to monopoly rest on what ground
obi Reply
there is transfer the income consumer to monopolist
ehtesham
discuss in detail
obi
please what is inflation
think
Well Monopolies take over a certain market and leave no room for competition. That's just not fair right? Monopolies are like comunistic businesses in the sense that they control all the factors of production and marketing of a product. Economists likely hate monopolies because they leave no room
Neil
For improvement
Neil
Yay I did something smart
Neil
Inflation is when there is an increase in circulation of money. It happens with the Fiat monetary system as there us nothng to back it up
Neil
no.dear..inflation can b defined as increase in general price level of goods..
shaikh
Neil has right about monopoly tht..they monopoly capture the market ..there is restriction on entry ...
shaikh
In terms of Supply and Demand, the textbook says Cetris Peribus only applies when all things are held constant. The 2 variables in this scenario is obviously Supply and Demand, as dipicted by the curve. But what are the so called constants?
Neil
that constant..prive
shaikh
oh ..IL.give this and later
shaikh
No wrong.
Shubham
the other constant are..price,income of the consumer,taste preference ,weather condition
shaikh
IL.explain all this later ..now I'm bzzy
shaikh
Gotchu
Neil
I shall be waiting for thine response
Neil
demand curve is mostly negatively slop when it will be possitive
Iftikhar
if the case is geffan goods then please explain gaffen good
Iftikhar
calculation of demand function
Abubakari
iftikhar ji..did u ask this giifen goods question to me?or someone else answering
shaikh
yah u can
Iftikhar
farzana yah u can
Iftikhar
the objection of economists to monopoly rests on the ground that monopoly leaves no room for competition & it gives firms the freedom to exploit consumers because in monopoly, they set the price & also determine the quantity to be supplied to the market
WILSON
That's basically what I said except little better explained lmao
Neil
hmm..rit neil
shaikh
giffen goods are goods purchased that have an inverse relationship between income and quantity demanded
The
like the higher the income the less the quantity demanded. Giffen goods are also called inferior goods
The
if resources were abundant there will be no need to study economics discuss
Berty Reply
An equilibrium price is a stable price and therefore must be allowed to stay discuss
Berty
anybody send me tha graph of law of supply...?..
Ali
my first time to study this subject
Kashif
hello bro i know about equilibrium..
Ali
at equilibrum point suppy and demand bcm equal
Ali
if resources were to b abundant, the study of economics will b useless
Michael
Economics came about because of scarcity of resources, humans have unlimited wants
Michael
and the study of how humans use their unlimited resources to satisfy their wants is 'economics'
Michael
Wow nyc idea
Berty
pls wt abt de equilibrium price
Berty
even if there was abundance of resources hypothetically speaking there could still be unequal ownership and control hence the need for economics
Ekeanyanwu
*limited
Michael
a typical example is the new report from the IMF and the World Bank that 1% of the world population controls the same amount of wealth as the remaining 99%
Ekeanyanwu
U mean do I understand or wt@ Nelson
Berty
a market involves seller(supply) and buyer(demand) and the price at which they agree on the exchange is equilibrium price
Michael
inequality in wealth distribution regardless of abundance or scarcity will continue to be a global problem so we need all the economists we can get
Ekeanyanwu
thanks
Ekeanyanwu
welcome
Michael
how is producer and consumer surplus calculated
Michael
if external forces such as government for any reason cause a movement in price the market will eventually adjust itself to a new eqilibrum price. the equilibrium price is not static.
Ekeanyanwu
if resources were abundant then no need to study economics because economics is the study of effective and efficient allocation of scarce resources amongst unlimited wants. Therefore if the resources were unlimited or abundant then every need will be met by each n every or any resources required
Alex
no is false because even if the resources where abundant we will still study economic because we need to know how to manage them at the right time and place and even how to distribute them equally within the country
ambe
yes even to see the demands and supply needed by house holds and firms
Angel
The law supply said that the higher the price the higher the quantity demanded
Assan
it's true that when resources are abundant there will be no need to study Economics.The reason is because the reason for Economics is scarcity(from Lionel Robbins definition) and when resources are not scarce it means there's no need to study Economics
The
I'm not sure of my answer.Choice and scale of preference is also as a result of scarcity.We experience tradeoffs and when resources are unlimited there will be no need to make choices
The
the law of supply States that the higher the price the higher the quantity supplied not demanded .
Ekeanyanwu
Really interesting...
Jacob
The Law of Diminishing return does not apply to land as factor of production, it also apply to labour as factor of production too. A 25 years boy and a 50 years old man having the same qualification as driver can never yield the same. '' Once a man twice a child''.
Ballah
sure
Delight
hey is any one in Cyprus from here
Tadiwa
Explain the market you think should be stable in the market economy regardless of economic, social, political and legal changes.
Angela Reply
What is natural monopoly
Ruchi Reply
what role does scarcity of resources play in economic decision making
jasmine
Natural Monopoly is an industry categorized by economies of scale sufficiently large that one firm can most efficiently supply the entire market demand.
Angela
what is economics?
Asrar Reply
economics is the study of how the society manage of its scarce resources.
Suleiman
study of how individuals make decisions to face scarcity
sumayo
what is price
lawrence Reply
the amount that is paide for something
Majid
the value of something expressed in terms of money
The
ìs what thing be cjanging for money
Aadan
Aadan I don't understand the message
The
what's the best economic book you read it?
Youssra
please any PDF format of any good ECONOMICS textbook in the house?
Chris
product or service's worth in terms of money
Boyboy

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask