Question

Theoretically, price is determined by the forces of market demand and supply. However,
is it really applicable today, given that information is imperfect in the market? Answer this
using an example

Guidelines:
Explain whether price is determined by the forces of market demand and supply
considering imperfect information. Substantiate on this by giving examples

Answer 1

When there is perfect market information to the parties involved in transaction,the price is determined as per the forces of demand and supply.

In the absence of perfect information , the equilibrium price and quantity is not easy to determine.

Imperfect information or asymmetric information is such a market situation when buyers or sellers have inadequate market information.In this situation , one or more parties have better information.

For example----------

* Insurance Contracts--- In case of life insurance ,the buyer ( insured) better knows his health condition than seller ( insurance company)

*Second hand products------ supposed a perdon is willing to sell his car, it is he, who better has information about his car, while the buyer is not aware much.

* Real Estate market----_ In real estate market, the seller of land or houses/ flats better knows the conditions instead of buyer of house.

* Financial Markets----- A borrower seeking loan from bank has better information about his financial condition to pay back.,while the lender is not much aware whether he is going to be defaulter or not.

After considering above examples ,we can conclude that market forces of demand and supply will not help much in determining price and quantity.