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Uncertainity in Economy

Autor:   •  February 28, 2012  •  Essay  •  418 Words (2 Pages)  •  953 Views

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Summary of uncertainty and information:

There is everywhere uncertainty and risk exist in human life. Uncertainty cannot be measure because there more than one event may occur. But risk can be measured with the probability. People are psychologically affected are based on their attitude they can be classified into various categories like risk lover and risk averser.Those attitude toward risk can be measure by using utility of wealth schedules and curve. The utility of wealth curve tells us that the more rapidly a person's marginal utility of wealth diminishes, that person is the more risk averse. A risk neutral person care only about expected wealth and doesn't mind how much uncertainty there is.Most people are risk averse and insurance enables them to reduce the risk. People give their risk to a insurance company for a premium. There are main four types of insurance exist. Health insurance reduces the risk of financial loss in the event of illness. Life insurance reduse the risk of financial loss in the event of death , and property insurance reduces risk of financial loss incase of accident . People generally by insurance to minimize the risk . People usually search economic information and in perfact competitive market information is free. But sometime it takes cost to collect the information . Generally investor use a decision rule called the optimal search rule. They search for a low price until expected additional marginal benefit equall the marginal cost . When the additional marginal benefit is less than marginal cost then they stop searching and buy . Sometimes it may happen that information is not available to either a buyer or seller.Private information is one persons knowledge that is too costly anyone else to discover . Private information creates the problem of moral hazard (the use private information to the advantage of the informed and the disadvantage of the uninformed after an agreement is made)

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