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Economics 1.3.4
Economics- Edexcel 1.3.4
| Term | Definition |
|---|---|
| information failure | occurs when people have inaccurate, incomplete, uncertain or misunderstood data ad so make potentially wrong or sub-optimal choices |
| does the government intervene in the market if information failure is present? | yes if it is persistent and may have a damaging effect on social welfare |
| causes of information failure | misunderstanding and uncertainty about true costs/benefits, complex or inaccurate information, addiction, lack of awareness and habitual purchase |
| information gap | exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision |
| asymmetric information | when one party in a transaction is in possession of more information than the other |
| symmetric information | a situation in which all parties in an economic transaction have access to the same information about the transaction |
| George Akerlof | wrote about imperfect information using the second-hand car market as an example to leading to adverse selection |
| 2 parts of asymmetric information | moral hazard and adverse selection |
| moral hazard in asymmetric information | occurs when insured consumers are likely to take greater risks knowing that a claim will be paid for by their cover, so the consumer knows more about their intended actions than the producer |
| adverse selection in asymmetric information | in health insurance: those most likely to purchase health insurance policies are those who are most likely to use it meaning the insurance company raises it’s prices pricing healthy low-risk consumers out of the market |
| risk pooling | the practice of sharing all risks among a group of insurance companies |
| insurance | market contract to protect against well-defined risk |
| insured | pay a premium |
| the law of big numbers | states that as a company grows, it becomes more difficult to sustain its previous growth rates |
| bounded rationality | the idea that the cognitive, decision-making capacity of humans cannot be fully rational in part because of the complexity of information involved |
| premium | a price paid for above and beyond some basic or intrinsic value |
| adverse selection | where the expected value of a transaction is known more accurately by the buyer |
| anchoring | the use of irrelevant information as a reference point for helping to make an estimate of something |
| confirmation bias | tendency for humans to only remember information that supports their own views |
| know-how | information required to develop, produce and bring products to market |
| paradox of choice | observation that more choices can lead to less satisfaction and economic welfare |
| risk | a known-unknown since agents can assign probabilities to each outcome |
| screening | finding out as much as possible about another agent in a transaction |
| signalling | when changing prices in a market send important information to producers and consumers |
| supplier induced demand | when doctors and dentists can manipulate their patients’ demand for medical services to create additional demand |
| tail end risk | portfolio risk greater than shown by a normal distribution |
| uncertainty | when an outcome is unknown and agents cannot assign probabilities to each outcome |
Created by:
jessharris
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