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INDIFFERENCE CURVE: A curve that graphically depicts various combinations of goods that generate the same level of utility to a consumer. In other words, a consumer is "indifferent" among any of the bundles because they all provide the same satisfaction. Indifference curves are combined with a budget line or constraint for indifference curve analysis used to explain many aspects of demand, including the slope of the demand curve and the income and substitution effects.

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INFORMATION SEARCH:

The decision to seek out or produce information based on a comparison of the cost of acquiring the information and the benefit obtained from the information. Efficient information search is achieved with a equality between the marginal cost of search and the marginal benefit of search. Because the marginal cost of search is invariably greater than zero, search effort stops short of acquiring complete information.
The acquisition of information is comparable to the production or consumption of any good. Acquiring information is beneficial, but doing so incurs a cost. Information is produced. Information is consumed.

The production of information, the transmission of knowledge, is termed information search. Like the production and consumption of other goods, efficient information search entails a balance between the cost of production (or marginal cost of search) and the benefits obtained from the information (marginal benefit of search).

Because information search uses scarce resources, the marginal cost of search is greater than zero and efficient information search always falls short of obtaining complete information. As such, no one knows everything and everyone is ignorant about something, often most everything. Ignorance is the rule rather than the exception.

Efficient information search and the ignorance that results, termed rational ignorance, is crticial to the study of public choice, contributing to voter apathy and government inefficiency.

Information Benefits and Costs

Information search, the decision to seek out or produce information depends on the benefits generated from the information and the costs incurred in obtaining the information.
  • Benefits: A primary benefit of information is a more efficient allocation of resources. If consumers have information about the location of goods, their prices, and their wants-and-needs satisfying characteristics, then they are better able to purchase goods that generate the greatest satisfaction at the lowest cost. If producers have information about the location of inputs, their prices, and their productive capabilities, then they are better able to purchase the inputs that generate the greatest production at the lowest cost. In both cases efficiency is enhanced. Information also provides benefits in other ways, not the least of which is the direct consumption of information. That is, some people (curious folks) satisfy their "need to know" just by acquiring information.

  • Costs: Like the production of other goods, the acquisition of information requires the use of scarce resources. Labor, capital, land, and entrepreneurship are all used to acquire information. The opportunity cost of labor, in particular, is key to most information search. Reading newspapers, magazines, and books; viewing television and movies; listening to radios and MP3s; surfing the Internet; and talking with other people are all means of searching for information and all incur the opportunity cost of human effort. Of course, capital, land, and entrepreneurship are also employed in the production of books, Internet web sites, television programs, audio files, and other "information goods." Use of these resources also incurs opportunity costs.
Comparable to other economic decisions, information search entails a balance between the benefit generated by the information and the cost of acquiring the information.

All About the Marginals

Efficiency, whether it is the efficient production of Wacky Willy Stuffed Amigos or the utility maximizing efficient consumption of Manny Mustard's Deluxe Club Sandwich, is achieved through a balance of marginals. For production, it is a balance between marginal revenue and marginal cost. For consumption it is a balance between marginal utility and price (marginal revenue).

For efficient information search it is a balance between the marginal benefit of search and the marginal cost of search.

  • Marginal Benefit of Search: The marginal benefit of search is the additional benefit obtained from information resulting from an incremental change in search effort. That is, what is the benefit of searching an additional hour. As search effort increases the extra benefit obtained decreases. Eventually, with relatively complete information, the incremental benefit of search falls to zero. For example, the first hour spent searching for the best price of Wacky Willy Stuffed Amigos might generate a range of different prices, from a high of $7 to a low of $5, resulting in a beneficial saving of $2. An additional hour of search might reveal a new low price of $4, for a marginal benefit of $1. Further search effort provides incrementally smaller benefits until no lower prices are revealed and the marginal benefit is zero.

  • Marginal Cost of Search: The marginal cost of search is the additional cost incurred for an incremental change in search effort. That is, what does it cost to search an additional hour. Comparable to the cost of producing any good, as search effort increases the extra cost incurred also increases. Additional search effort requires additional scarce resources with alternative uses and increasing opportunity cost. For example, the first hour of searching for the lowest price of Wacky Willy Stuffed Amigos might entail an inexpensive walk to a nearby drug store. The next hour might then require a more distant and expensive drive to a discount super center. Further searching requires additional increasingly cost resources.

Efficient Search

Efficient Search
Efficient Search


Efficient information search, that is, the production of information, can be illustrated with a standard "demand and supply" type diagram. The exhibit to the right presents the framework for this analysis. The vertical axis measures the cost and benefit of undertaking search effort. The horizontal axis then measures the amount of information search effort, in this case measured in hours.

Efficiency is achieved with a balance between benefit and cost, or more specifically, the marginal benefit of search and the marginal cost of search. Each is represented by its own curve.

  • Marginal Benefit of Search Curve: The marginal benefit of search is represented by the negatively-sloped marginal benefit curve. Click the [MBS] button to reveal this curve. The MBS curve is negatively-sloped like a standard market demand curve.

  • Marginal Cost of Search Curve: The marginal cost of search is represented by the positively-sloped marginal cost curve. Click the [MCS] button to reveal this curve. The MCS curve is positively-sloped like a standard market supply curve.
The intersection of the MBS curve and the MCS curve indicates the efficiently level of information search. Click the [Efficient] button to highlight this intersection. In this exhibit, the MBS and MCS curves intersect at a search level of 5 hours. That is, 5 hours of search balances the additional benefit obtained from extra search effort and the additional cost of the extra effort.

Searching more than 5 hours means the cost of extra search exceeds the benefit. Extra search is not worthwhile. Searching less than 5 hours means the benefit of extra search exceeds the cost. Extra search is worthwhile.

Key to this analysis is that as long as search is costly, search effort will not increase to the level that forces the marginal benefit of search to zero, to the level in which no further benefit can be obtained. In other words people decided to stop short of complete information. They voluntarily choose to remain (somewhat) ignorant

This result gives rise to what is termed the sixth rule of ignorance, which states that obtaining information is a costly activity that requires resources with alternative uses and thus no one knows everything and everyone is ignorant about something.

Rational Ignorance

The decision to undertake a level of search that stops short of complete knowledge is a perfectly rational one. It is no different than the decision to eat four slices of pizza rather than five. It also gives rise to the concepts or rational ignorance.

Rational ignorance is the decision NOT to become informed about a topic (such as what a political candidate wants to do) because the cost of acquiring the information is more than the expected benefit. The rational decision to remain ignorant about a subject is a straightforward application of utility maximization.

Rational ignorance is important to the study of public choice and voting behavior. The rational decisions to remain ignorant is a key sources of voter apathy and government inefficiency. That is, seemingly apathetic people have simply decided NOT to be informed about the political process because it's not worth the effort.

Information Issues

The economic study of information and the efficient search for information provides useful analysis for a number of important issues.
  • Asymmetric Information: First up is the observation that information is not equally available to everyone, asymmetric information. Some people are bound to rationally choose to know more than others. In particular, information is likely to be unbalanced or asymmetrically available to buyers and sellers in a market. Sellers, who have possession of a good, often have more information than buyers.

  • Adverse Selection: An important consequence of asymmetric information is adverse selection, which arises when the lack of information limits the quality of goods exchanged. Because buyers have less accurate information about the quality of goods, they are likely to offer a lower price, which discourages sellers from offering higher quality goods.

  • Moral Hazard: Asymmetric information also leads to moral hazard, which arises when one person makes a decision that adversely affects another. The best example is found with insurance in which an insured person undertakes risky behavior knowing the insurance provider incurs the cost. The problem is that the insurance provider is unaware of the risky actions of the insured person.

  • Signalling: Because people lack complete information, they necessarily make decisions based on the few key bits that are available. That is, people seek out indicators or signals that reflect the "bigger picture." For example, an employer uses grade point average as a signal of the quality of a prospective employee. A consumer uses brand name as a signal of the quality of product.

  • Financial Markets: Information is a key factor in financial markets. Financial markets exchange financial instruments or legal claims, such as stocks, bonds, and futures contracts. Those who buy and sell legal claims do so based on information they have about current and expected values. The accuracy of this information plays a big part in who "wins" and "loses" in the financial markets.

<= INFORMATIONINJECTIONS =>


Recommended Citation:

INFORMATION SEARCH, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 20, 2018].


Check Out These Related Terms...

     | economics of information | asymmetric information | adverse selection | moral hazard | marginal benefit of search | marginal cost of search |


Or For A Little Background...

     | market | barter | scarcity | efficiency | sixth rule of ignorance | marginal cost | marginal revenue |


And For Further Study...

     | public choice | innovation | good types | market failures | financial markets | institutions | rational ignorance | rational abstention | risk | uncertainty | risk preferences | risk aversion | risk neutrality | risk loving | marginal utility of income |


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