Question

Explain whether price is determined by the forces of market demand and supply
considering imperfect information.

Answer 1

Forces of demand and supply help in reaching market equilibrium. But there are situations when there is imperfect information in the market.

Imperfect information is basically when the buyers as well as the sellers or either one of them do not have adequate or complete information about the quality and price of the product. Thus proper or accurate decision regarding the price cannot be made because of this.

Demand curve is a downward sloping curve whereas supply curve is an upward sloping curve.

Prices are determined by forces of demand and supply when correct and accurate information about the product or service is available. Equilibrium is basically a point where demand and the supply curves intersect each other.

Markets having imperfect information have to be dealt with in a different way. Prices are not determined by forces of demand and supply because accurate information about the quality of the product is not known by either buyer or seller or both.

Hence in different markets , different decisions have to be taken. For example in goods market, if the party is facing challenge of imperfect information, then they have to depend on cashback, warranty, guarantee etc.

Thus prices cannot be defined by the market forces of demand and supply in a market where there is imperfect information.