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Lecture Principles of microeconomics - Chapter 12: The economics of information

This chapter introduces you to the economics of information and the role of asymmetric information in completing transactions. You will learn that the prices of products in the marketplace are often affected because buyers and sellers do not share the same information. | The Economics of Information Slide 12 - What is Chapter 12 about? Slide 12 - I. The Importance of Information Slide 12 - Perfect Information The invisible hand theory assumes perfect information What goods and services are available What prices they sell for The quality of the goods and services But information can be costly or impossible to obtain Slide 12 - Gathering Information Two Key cases: Information that is costly to acquire Issue then is what strategies to use to gather information & when do we have enough Read Consumer Reports, Talk to family and friends, Internet, Direct contacts Information that is inherently asymmetric Seller may have opportunity & motive not to disclose information (e.g. used car) When information is being purchased, seller inevitably knows more (e.g. MD, lawyer) Slide 12 - Middleman can add Value by certifying quality Consumers must rely on information from others Sales agents or “middlemen” Provide the service of gathering . | The Economics of Information Slide 12 - What is Chapter 12 about? Slide 12 - I. The Importance of Information Slide 12 - Perfect Information The invisible hand theory assumes perfect information What goods and services are available What prices they sell for The quality of the goods and services But information can be costly or impossible to obtain Slide 12 - Gathering Information Two Key cases: Information that is costly to acquire Issue then is what strategies to use to gather information & when do we have enough Read Consumer Reports, Talk to family and friends, Internet, Direct contacts Information that is inherently asymmetric Seller may have opportunity & motive not to disclose information (e.g. used car) When information is being purchased, seller inevitably knows more (e.g. MD, lawyer) Slide 12 - Middleman can add Value by certifying quality Consumers must rely on information from others Sales agents or “middlemen” Provide the service of gathering information Make it available to people who can use it Consumers’ trade off: benefits from search - lower price? costs (time & $) of search Specialists enable more total economic surplus as goods go from lower-valued uses to higher- valued uses Slide 12 - II. The Optimal Amount of Information Slide 12 - When do I have “enough” information to decide ? Benefits - having more information is better than having less BUT The value of additional information tends to decline beyond some point Costs - Information is often costly to acquire Time cost = opportunity cost of time The marginal cost of gathering additional information increases, if people gather from the cheapest sources first Slide 12 - Fig. 12.1 The Optimal Amount of Information Slide 12 - Optimal Amount of Information AKA the optimal amount of ignorance Search can be seen as an investment activity – investing in information Rule: stop collecting information when the marginal expected benefit equals the marginal expected .