BUSINESS ECONOMICS BOOK pdf

Conditions for Price Discrimination

Price discrimination works when (any three):

• Seller has market power (imperfect competition) so it can influence price.
• Ability to segment the market into groups with different willingness to pay (students, adults; peak, off-peak).
• Prevention of resale/arbitrage between markets; otherwise buyers will buy cheap and resell.
• Different price elasticity across segments (more elastic group gets lower price).

Examples:

• cinema offers student discount.
• airlines charge different fares for same route based on booking time and class.

Thus, segmentation + no resale are essential for effective price discrimination.

Exceptions (any three):

• Veblen (prestige) goods: higher price may increase demand due to status.
• Giffen goods: very inferior goods where income effect dominates (rare).
• Speculation/expectations: expected future price rise can increase current demand.
• Quality perception: high price is treated as better quality by some consumers.

Thus, in special cases price and demand can move in the same direction.

Stagflation and Policy Measures (Exam-Style)

Stagflation is a difficult situation where:

• inflation is high,
• unemployment is high, and
• growth is slow/stagnant.

It is often caused by supply shocks (e.g., oil price rise), structural bottlenecks and weak productivity.

Why it is challenging

• Policies that reduce inflation (tight money) may further reduce demand and increase unemployment.
• Policies that reduce unemployment (stimulus) may increase inflation.

Suitable policy mix

Conclusion: Stagflation needs a balanced policy mix—supply-side reforms plus careful demand management—to reduce inflation without worsening unemployment too much.