KSLU Solved Question Papers
Principles of Economics
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 1
2017 Dec Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 1 Principles of Economics 2017 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2017 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2017 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Explain the features, merits and defects of capitalism.[16]
Answer
For full marks, cover: the meaning of capitalism and its intellectual root in Adam Smith's invisible hand; how the price mechanism answers the central questions; the features; the merits; the defects, including trade cycles and inequality; how modern capitalism has been changed by regulation and welfare; a comparison table; and a conclusion.
Meaning
Capitalism is an economic system in which the means of production, such as land, factories, machines and mines, are privately owned. They are used to earn profit. Economic decisions are taken by private individuals and firms through the market, guided by the price mechanism. The role of the State is limited, mainly to maintaining law and order, enforcing contracts and defending the country.
It is also called the free enterprise economy, the market economy or the laissez-faire economy. The phrase laissez-faire means "let them do", that is, let individuals pursue their own business without interference.
The intellectual root: Adam Smith
The case for capitalism was first set out by Adam Smith in The Wealth of Nations (1776). He argued that a person who seeks only his own gain is "led by an invisible hand to promote an end which was no part of his intention". By pursuing his own interest, he often serves society better than if he tried to do so directly. A baker bakes bread to earn a living, yet the town is fed. Self-interest, working through competition, produces social benefit.
How capitalism answers the central questions
Every economy must decide what, how and for whom to produce. Under capitalism, prices decide all three.
- What to produce. Firms produce goods that buyers will pay for, because these earn profit. If people want more mobile phones and fewer radios, the price and profit of phones rise and producers switch to phones.
- How to produce. Firms choose the cheapest method, because lower cost means higher profit.
- For whom to produce. Goods go to those who can pay. A person's share depends on his income, which depends on the price of the factors he owns: his labour, land or capital.
No central authority plans this. The market coordinates millions of decisions automatically.
A worked example: how prices guide production. Suppose a poor monsoon cuts the supply of onions. Their price rises sharply. Households buy fewer onions and use substitutes where they can. Traders bring onions from other regions where they are cheaper. Next season, farmers see the high price and plant more onions. Supply rises and the price falls back. Nobody ordered any of this. Each person simply responded to the price in his own interest, and the shortage was gradually corrected. This is the price mechanism at work, and it is the heart of capitalism.
Features of capitalism
1. Private property. Individuals have the right to own property, including factories and land, and to pass it on to their heirs.
2. Freedom of enterprise. Anyone may start a business, choose what to produce and how, and close it at will.
3. Profit motive. The desire for profit drives production. It is the main incentive for effort, risk-taking and innovation.
4. Price mechanism. Prices, set by demand and supply, guide all economic decisions.
5. Consumer sovereignty. Consumers decide, through their spending, what will be produced. The consumer is said to be the king of the market.
6. Competition. Many producers compete for buyers, and many workers and employers compete in the labour market. Competition keeps prices low and quality high.
7. Freedom of occupation. Workers may choose their jobs and change them.
8. Limited role of the State. The State provides law, order, defence and enforcement of contracts, but does not run business.
9. Division into classes. Society is broadly divided between those who own capital and those who work for wages.
10. Inequality of income. Income depends on property and ability, so incomes are unequal.
Merits of capitalism
1. Efficiency. Competition and the profit motive push firms to cut costs and use resources well. Inefficient firms are driven out.
2. Economic growth. Saving, investment and innovation are rewarded, so the economy grows. The rise in living standards in many countries since the industrial revolution happened largely under capitalism.
3. Innovation and technical progress. The hope of profit encourages new products and methods.
4. Consumer choice. Consumers enjoy a wide variety of goods and services.
5. Economic freedom. People are free to own property, start businesses, choose occupations and spend as they wish.
6. Automatic working. The price mechanism coordinates the economy without a costly planning bureaucracy.
7. Flexibility. The system adjusts quickly to changes in tastes, technology and resources.
8. Reward for effort. Those who work harder, save more or take risks are rewarded.
Defects of capitalism
1. Inequality of income and wealth. Private property and inheritance concentrate wealth in a few hands, while many remain poor. Inequality then passes from one generation to the next.
2. Exploitation of labour. Workers with weak bargaining power may be paid low wages and made to work in poor conditions.
3. Growth of monopolies. Competition can end in monopoly as large firms swallow small ones. Monopolies raise prices and restrict output.
4. Trade cycles and unemployment. Capitalist economies swing between booms and depressions. In the Great Depression of the 1930s, millions lost their jobs for years together. Unemployment is a recurring feature of the system.
5. Wasteful competition. Firms spend heavily on rival advertising and duplicate plants.
6. Production for the rich. Since goods go to those who can pay, luxuries for the rich may be produced while the poor lack necessities.
7. Neglect of public goods. Roads, public health and basic education may be under-supplied, because they are not profitable to private firms.
8. Social costs. Firms may pollute air and water, because they do not pay for the damage. The cost falls on society.
9. Consumer sovereignty is limited. Advertising shapes tastes, and monopolies restrict choice, so the consumer is not truly king.
10. Class conflict. The division between owners and workers can lead to strikes and social tension.
Modern capitalism
Pure laissez-faire capitalism no longer exists anywhere. After the Great Depression, governments in capitalist countries began to manage total demand, regulate business and provide social security. Today they:
- Regulate monopoly through competition law. In India, section 4 of the Competition Act, 2002 forbids abuse of a dominant position.
- Protect workers through labour laws and minimum wages. In India, the Code on Wages, 2019 requires minimum wages to be fixed.
- Provide welfare, such as pensions, health care and unemployment support.
- Tax the rich more heavily to reduce inequality.
So most "capitalist" countries are in fact mixed economies in which the market leads and the State corrects.
The Indian position. India has never been a purely capitalist economy. Private enterprise has always run most of agriculture, trade and small industry. After the New Industrial Policy of 24 July 1991 abolished most industrial licensing, private enterprise also grew rapidly in large industry and services. But the State still regulates markets, runs important public enterprises and provides welfare. India therefore uses the strengths of capitalism within a mixed economy, guided by the directive principles of the Constitution.
Capitalism and socialism compared
| Point | Capitalism | Socialism |
|---|---|---|
| Ownership of means of production | Private | State or society |
| Main motive | Profit | Social welfare |
| Decision maker | Market, through prices | Central planning authority |
| Consumer choice | Wide | Limited |
| Efficiency | High | Low |
| Inequality | High | Low |
| Trade cycles | Recurring | Avoided by planning |
| Freedom | Wide economic freedom | Restricted |
Conclusion. Capitalism is an economic system of private ownership, profit motive and free markets. In it the price mechanism decides what, how and for whom to produce. Its features include private property, freedom of enterprise, competition and consumer sovereignty. Its merits are efficiency, growth, innovation, choice and freedom. Its defects are inequality, exploitation, monopoly, trade cycles, neglect of public goods and social costs. Because of these defects, modern capitalist economies regulate markets and provide welfare. Most of them are therefore mixed economies in which the market leads and the State corrects its failures.
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