1.2.2 Imperfect information
A lemon is the nickname for an American car
that has a problem. The problem is only
discovered after the car has been bought.
This occurs because the seller of the car has
greater information than the buyer.
Have you ever bought a lemon?
AQA 1.2: I NDIVIDUAL E CONOMIC D ECISION
M AKING
1.2.2 W HAT
YOU NEED TO KNOW

The importance of information for decision
making

The significance of asymmetric information

Students should recognise that imperfect
information makes it difficult for economic
agents to make rational decisions and is a
potential source of market failure
T HE IMPORTANCE OF INFORMATION FOR
DECISION MAKING
Information failure
at the
supermarket.

Without having full information about a product it is difficult for
consumers and producers to make decisions regarding price,
quality and other relevant factors when buying and selling

Information failure is a type of market failure where consumers
or producers:


do not have symmetric information

have asymmetric information
This can lead to the misallocation of resources as one party in a
transaction has greater information than another so not all
economic agents are able to make informed decisions
T HE IMPORTANCE OF INFORMATION FOR
DECISION MAKING
.

To what extent do
you think. that the
Internet has reduced
information
asymmetry?
Symmetric information is when all the relevant information is
known by both parties

Information asymmetry occurs when some parties in a
transaction have more information regarding the product than
others

Perfect knowledge is a theoretical concept which occurs when all
consumers in a market are fully aware of price, quantity available
and other relevant information for all products when making
buying decisions.
T HE
.
.
Does asymmetric
information exist in
the energy market?
Does it affect
different customers
differently?
SIGNIFICANCE OF ASYMMETRIC INFORMATION

Markets are unable to operate efficiently if economic agents do not
have appropriate information

An assumption of perfect competition is that economic agents have
perfect information

In reality, imperfect markets do not, and never will, have perfect
information. One party is likely to have more information than the
other

Economic agents are unable to undertake rational decision making
unless they have the information required to make these decisions

Therefore, free markets are likely to misallocate resources

However, this does not mean that the means to provide good quality
information does not exist and technology such as the internet has
reduced the imbalance of power between two parties
I MPERFECT

MARKET INFORMATION
Is perfect knowledge an achievable concept?

Alcohol

Misselling
Split the class into 3 teams.
Each team to take 1 market: health care, education or alcohol.
Prepare a brief presentation to explain how imperfect market
information may lead to the misallocation of resources in that
market.
T EST
Define the term
information failure.
1.
Explain why there is likely to be information failure
amongst consumers at supermarkets.
2.
Why don’t all economic agents have perfect knowledge
regarding goods and services?
3.
Explain why merit goods may be under provided.
Define the term
perfect knowledge.
Define the term
asymmetric
knowledge.
YOURSELF