A Level Economics AQA Practice Exam

What does imperfect information refer to in economics?

1. Having excess information about products

2. The unenforceability of contracts

3. The absence of full knowledge about product characteristics and prices

4. The perfect knowledge of all market participants

The correct answer is: The absence of full knowledge about product characteristics and prices

Imperfect information in economics refers to situations where consumers and producers do not have complete knowledge about the characteristics of products, their prices, or the market itself. This lack of full knowledge can lead to inefficiencies in the market, as consumers may make suboptimal purchasing decisions, and producers may not be able to set prices that reflect true supply and demand dynamics. For instance, if consumers are unaware of a better product or price available in the market, they may settle for inferior options, leading to a misallocation of resources. Similarly, if producers lack information about consumer preferences or competitor pricing, they may not optimize their production or pricing strategies, impacting overall market equilibrium. Imperfect information is a key concept in understanding market failures and can lead to various market distortions, such as adverse selection and moral hazard. Therefore, the correct choice highlights the core idea that participants in a market often operate with limited and unequal information, affecting their decision-making processes and the efficiency of transactions.