BLS LLB 5 Years Sem 1 Economics 2022-23 - ATKT Question Paper with Solutions

The wealth definition is the oldest definition of economics, given by Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), which is why he is called the Father of Economics. He defined economics as "the science of wealth", concerned with the production, distribution and consumption of wealth and with the causes of a nation's prosperity.

Two of its features:

1. Wealth is the central subject. Economics studies how wealth is produced, exchanged, distributed and consumed, and man enters the study only as a means of producing it.
2. Only material goods count as wealth. Wealth means things that are material, transferable, scarce and have value in exchange, so services, which produce no material object, were excluded.

Two further features: it treats self-interest and the free market, guided by Smith's "invisible hand", as the engine of prosperity; and it is concerned with the causes of national wealth, particularly the division of labour.

Stock is the total quantity of a commodity available with the seller at a given point of time, whether or not it is offered for sale.

Supply is the quantity of a commodity that a seller is willing and able to offer for sale at a given price during a given period of time.

Stock is potential supply; supply is that part of the stock actually brought to market at a given price. Therefore Supply ≤ Stock.

Social cost is the total cost of an economic activity to society as a whole. It is the sum of the private cost borne by the producer and the external cost imposed on others who are not party to the transaction.

Social cost = Private cost + External cost

Private cost is what the firm itself pays: wages, rent, raw materials, interest. External cost, or the negative externality, is the cost thrown on to third parties, for which the firm pays nothing.

Example: a factory discharging effluent into a river bears the private cost of its labour and materials, while the villagers downstream bear the cost of polluted water, lost fishing and illness. That damage is the external cost, and adding it to the firm's own cost gives the social cost.

1. The Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MGNREGA). It guarantees 100 days of unskilled wage employment in a financial year to every rural household whose adult members volunteer for it, and provides an unemployment allowance if work is not given within 15 days. It is a statutory right, not a discretionary scheme. It attacks poverty twice over: by providing wage income directly, and by creating durable rural assets such as water conservation works and roads.

2. The National Food Security Act, 2013. It creates a legal entitlement to subsidised food grain, 5 kg per person per month for priority households and 35 kg per household under the Antyodaya Anna Yojana, delivered through the public distribution system and covering up to 75% of the rural and 50% of the urban population.

Other Acts worth naming: the Right of Children to Free and Compulsory Education Act, 2009, which attacks the illiteracy that reproduces poverty; the Code on Wages, 2019, providing a statutory floor wage; and the Unorganised Workers' Social Security Act, 2008.

An indirect tax is a tax whose impact and incidence fall on different persons: it is paid to the government by the seller but the burden is shifted to the buyer through the price.

Two examples:

1. Goods and Services Tax (GST), levied on the supply of goods and services, introduced on 1 July 2017 by the 101st Constitutional Amendment and levied concurrently by the Union and the States under Article 246A. It replaced most earlier indirect taxes, including excise duty, service tax, VAT and octroi.
2. Customs duty, levied on goods imported into and exported out of India under the Customs Act, 1962.

Two further examples: excise duty, which still applies to petroleum products and alcohol, both kept outside GST; and stamp duty on instruments.

Public expenditure is the spending incurred by central, state and local governments to satisfy collective needs and to promote economic and social welfare. It is one of the four divisions of public finance, along with public revenue, public debt and financial administration.

Its classification:

1. Revenue expenditure: recurring, and creating no asset. Salaries, pensions, interest payments, subsidies, maintenance.
2. Capital expenditure: creating a durable asset or reducing a liability. Roads, bridges, schools, defence equipment.

It is also classified as developmental (education, health, irrigation) and non-developmental (defence, administration, interest).

Meaning

Income elasticity of demand (Ey) measures the degree of responsiveness of the quantity demanded of a commodity to a change in the income of the consumer, the price of the commodity remaining unchanged.

Ey = percentage change in quantity demanded ÷ percentage change in income

Ey = (ΔQ ÷ Q) × 100 ÷ (ΔY ÷ Y) × 100

It is a ratio of percentages and therefore a pure number with no unit.

Types

1. Positive income elasticity (Ey > 0): normal goods. Demand rises as income rises. Most goods are of this kind. It has three sub-types:

• Ey > 1: luxuries (superior goods). Demand rises more than proportionately with income. Examples: cars, air travel, branded clothing, restaurant meals.

1. Business forecasting. A firm selling goods with high income elasticity grows faster than the economy in a boom and suffers more in a recession; a firm selling necessities is insulated from both.
2. Production planning, since rising national income shifts demand towards luxuries and away from inferior goods.
3. Government policy, in deciding what to tax and what to subsidise: subsidies on goods with low or negative income elasticity reach the poor most reliably.
4. Understanding structural change, since the composition of demand in a growing economy shifts predictably from food towards manufactures and then towards services.

• Economies of scale so large that one firm supplies the whole market more cheaply than several could, a natural monopoly, as in electricity distribution or piped water
• Very large capital requirements

4. The monopolist is a price maker. Unlike a firm under perfect competition, which takes the ruling price, a monopolist can set the price. But it cannot set price and quantity independently: it may fix either the price and let the market decide the quantity, or the quantity and let the market decide the price, because it must remain on its demand curve.

5. A downward sloping demand curve, and marginal revenue below average revenue. To sell more the monopolist must lower the price on all units, so MR falls faster than AR and lies below it. Equilibrium is where MC = MR with MC cutting MR from below.

6. Supernormal profit can persist in the long run. In every other market form entry competes profit away. Here entry is blocked, so abnormal profit survives.

Meaning

The marginal productivity theory of wages holds that the wage of labour tends to equal the value of the marginal product of labour. It is the standard neo-classical theory of factor pricing, developed by J. B. Clark, and applied to every factor, not only to labour: rent, interest and wages are all explained the same way.

The marginal product of labour (MPL) is the addition made to total output by employing one more unit of labour, the other factors remaining unchanged. Its money value is the Value of Marginal Product (VMP = MPL × price), or under imperfect competition the Marginal Revenue Product (MRP = MPL × marginal revenue).

Wage = Marginal Revenue Product of Labour

The reasoning

A rational employer goes on hiring so long as an extra worker adds more to revenue than to cost.

• If MRP > wage, the worker adds more than they cost, so hiring more raises profit.

Criticism

1. The assumptions are unreal. Perfect competition, perfect mobility and full employment do not exist; involuntary unemployment does.
2. Labour is not homogeneous. Workers differ in skill, training and effort.
3. Marginal product cannot be measured separately, since production is a joint effort of all factors. It is impossible to say which part of the output a single worker produced.
4. It ignores the supply side. It explains the demand for labour and treats supply as given, so it is a one-sided theory. Wages are determined by demand and supply together.
5. It ignores collective bargaining. Trade unions, minimum wage laws and awards of industrial tribunals affect wages, and the theory has no place for them.
6. It ignores the influence of the State and of custom.
7. It is static, assuming the other factors and the technique are fixed, which they are not.
8. Monopsony. Where there is a single large employer, the wage settles below the marginal product, and the theory cannot explain that.

Meaning and origin

The World Trade Organization (WTO) is the international body that frames the rules of trade between nations and provides a forum for negotiating trade agreements and settling trade disputes.

It was established on 1 January 1995 by the Marrakesh Agreement, as the successor to the General Agreement on Tariffs and Trade (GATT), 1947, following the Uruguay Round of negotiations (1986 to 1994). Its headquarters is at Geneva, Switzerland, and it has 166 members, who together account for almost all world trade. India is a founder member, as it was of GATT.

Objectives

1. To raise standards of living, income and effective demand in member countries.
2. To expand production of and trade in goods and services.
3. To ensure the optimal use of the world's resources consistent with sustainable development.

Principles

Most Favoured Nation (MFN), a concession given to one member must be given to all; National Treatment, imported goods must be treated no less favourably than domestic goods once they have entered the market; transparency; binding tariff commitments; and special and differential treatment for developing countries.

Structure

Ministerial Conference, the highest body, meeting at least once every two years; General Council; specialised councils and committees; and a Secretariat at Geneva headed by a Director-General. Decisions are taken by consensus.

India and the WTO

India has used the WTO to challenge protectionist measures against its exports and to defend its public stockholding of food grain at minimum support prices, which is protected by the peace clause agreed at the Bali Ministerial Conference in 2013. TRIPS obliged India to recognise product patents, which it did through the Patents (Amendment) Act, 2005.

2. It brings efficiency and investment to agriculture-related undertakings. Public sector fertiliser plants, seed corporations, agro-industries corporations and state trading bodies have often run at low capacity with dated technology. Private capital and management can raise output and quality, and cheaper, better fertiliser and seed reach the farmer as lower input costs.

3. It improves rural credit and insurance. Public offers by insurers and banks have widened their capital base and forced disclosure and market discipline on them, which supports crop insurance and rural lending.

4. It encourages competition. Where a public undertaking held a monopoly over an input or over procurement, competition after disinvestment can improve the terms the farmer gets.

5. It attracts investment into food processing and the cold chain, which raises the value of what the farmer sells and reduces post-harvest loss.

5. The benefits, where they exist, reach large farmers first, since it is they who buy at scale, deal with organised suppliers and can meet the standards of processors.

Conclusion

Disinvestment policy has, at best, helped Indian agriculture indirectly and marginally. It can improve the efficiency of the undertakings that supply the farmer and free money that a government may choose to invest in rural infrastructure, but it is not an agricultural policy and was never designed as one.

What improves Indian agriculture is irrigation, research and extension, secure tenancy, better marketing, institutional credit and, above all, non-farm employment that reduces the number of people the land must support. Disinvestment can pay for some of these; it cannot substitute for them.

2. The Prohibition of Child Marriage Act, 2006. Fixes the minimum age of marriage at 18 for women and 21 for men, makes a child marriage voidable at the option of the contracting party who was a child, and punishes those who perform or promote it. Its importance: raising the age at marriage shortens the reproductive span and delays the first birth, which is among the most effective instruments available, and it also keeps girls in education longer.

3. The Medical Termination of Pregnancy Act, 1971, as amended in 2021. Permits termination on specified grounds by registered practitioners, and the 2021 amendment extended the permissible period and widened the categories. Its importance: it reduces unsafe abortion, protects maternal health and gives women effective control over childbearing.

4. The Pre-Conception and Pre-Natal Diagnostic Techniques (PCPNDT) Act, 1994. Prohibits sex determination and sex-selective abortion. Its importance for population control is indirect but real: it attacks son preference, which causes couples to continue having children until a son is born. It also protects the sex ratio, which had been falling sharply.

Conclusion

Law's importance in Indian population control is enabling and indirect rather than coercive. It raises the age at marriage, protects reproductive health, attacks son preference and secures education for girls, and these together lower fertility far more reliably than compulsion ever did.

Specimen working, for 5 units

1. TFC = ₹100 (unchanged at every output)
2. TVC = TC − TFC = 350 − 100 = ₹250
3. AFC = TFC ÷ Q = 100 ÷ 5 = ₹20.00
4. AVC = TVC ÷ Q = 250 ÷ 5 = ₹50.00
5. AC = TC ÷ Q = 350 ÷ 5 = ₹70.00, which equals AFC + AVC = 20.00 + 50.00 ✓
6. MC = TC at 5 units − TC at 4 units = 350 − 300 = ₹50

Checks that prove the table is right

1. AC = AFC + AVC at every row. Verify one or two in the answer book.
2. The MC column adds up to TVC: 0 + 50 + 80 + 70 + 50 + 30 + 30 + 30 = 340, which is TVC at 8 units. ✓

The problem

An adverse (deficit) balance of payments arises when a country's autonomous payments to the rest of the world exceed its autonomous receipts, so the gap must be met by drawing on reserves or by borrowing. It is caused chiefly by a heavy import bill, particularly of crude petroleum and gold, slow export growth, inflation at home, heavy debt servicing and volatile capital flows.

The measures to correct it fall into four groups.

A. Monetary measures

1. Deflation. Reducing the money supply and raising interest rates lowers domestic prices and incomes, which makes exports cheaper abroad and reduces the demand for imports. It is effective but costly, since it also reduces output and employment, and it is rarely used deliberately today.

6. Import substitution. Producing at home what was formerly imported, through Make in India and the Production Linked Incentive schemes, particularly in electronics, and through ethanol blending and renewable energy to reduce the oil bill.

7. Import restriction by tariffs, quotas and licensing, within the limits permitted by WTO commitments. Duties on gold have been used repeatedly in India for exactly this purpose.

C. Capital and financing measures

8. Encouraging foreign direct investment rather than portfolio investment, since FDI is long-term and cannot leave overnight. 9. Encouraging remittances from citizens abroad, of which India is the world's largest recipient. 10. Foreign loans and assistance from the IMF, the World Bank or friendly countries, which buys time but adds to future debt servicing. 11. Building foreign exchange reserves in good years as a buffer for bad ones. India's reserves now exceed 700 billion US dollars. 12. Rupee trade settlement arrangements with willing partners, which reduce the demand for dollars.

Price ↑ → Quantity demanded ↓
Price ↓ → Quantity demanded ↑

Demand schedule

Plotting price on the vertical axis and quantity on the horizontal axis and joining the points gives the demand curve, which slopes downward from left to right.

Assumptions of the law

The law holds only if "other things remain equal". The assumptions are:

1. No change in the income of the consumer.
2. No change in the price of related goods, substitutes and complements.
3. No change in taste, preference or fashion.
4. No expectation of a future change in price.

1. Giffen goods. Strongly inferior goods forming a large part of a poor household's budget. A price rise makes the household so much poorer in real terms that it abandons the costlier substitute and buys more of the cheap staple. Named after Sir Robert Giffen, whose observation of bread among nineteenth-century English labourers was reported by Marshall. Example: coarse cereals such as bajra for a very poor family.
2. Veblen goods (conspicuous consumption). Luxury goods bought for display of status, where the high price is itself the attraction. Described by Thorstein Veblen, The Theory of the Leisure Class (1899). Example: diamonds, designer handbags, luxury watches.
3. Expectation of a further price change. If buyers expect prices to rise further they buy more now despite the higher price. Example: gold or property in a rising market.
4. Ignorance and the price-quality illusion. Buyers treat a high price as a signal of quality and buy the dearer of two identical goods.
5. Necessities of life, whose demand changes little with price: salt, life-saving medicine, food grains.
6. Speculative demand in share and commodity markets, where a rising price attracts more buyers.

Introduction

Law and economics are concerned with the same underlying fact: resources are scarce, so rules are needed to decide who gets what. Economics explains how scarce resources are allocated and how people respond to incentives; law creates and enforces the rights that make an allocation binding. Neither is complete without the other, which is why economics is taught in the first semester of a five-year law course.

The points of relevance

1. Both subjects rest on scarcity and choice. Economics studies the allocation of scarce means among competing ends. The law of property decides who owns a scarce resource; the law of contract governs its voluntary transfer; the law of succession governs its transfer on death. These are allocation rules expressed in legal form.

2. Economic legislation cannot be applied without economics. Whole statutes are built on economic concepts:

4. Externalities, and the whole of environmental law. An externality is a cost or benefit falling on someone who is not party to a transaction. Pollution is the standard case. The polluter pays principle and the precautionary principle, both adopted by the Supreme Court of India, are economic ideas in legal dress: they internalise a cost that would otherwise be shifted to society. Much of nuisance, tort and planning law can be described the same way.

5. Incentives and deterrence in criminal law. Penalties work by altering behaviour at the margin. Deterrence is marginal analysis: the expected cost of an offence, being the penalty multiplied by the probability of detection, must exceed its expected benefit. That is why raising the certainty of detection often deters better than raising the severity of punishment.

6. Damages are an economic calculation. What would the claimant's position have been but for the breach or the wrong? Loss of profits, loss of earning capacity, mitigation and the discounting of future losses to present value are all economics applied by courts every day.

11. Public finance and the constitutional division of taxing powers. The distinction between direct and indirect taxes, between impact and incidence, and the division of taxing powers under the Seventh Schedule and Article 265, are public finance applied constitutionally.

12. Judicial and legislative policy generally. Any law that ignores incentives will be evaded. Rent control that fixes rents below the market reduces the supply of rental housing; a licensing system creates a scarcity value and therefore corruption. Economics predicts the consequence a statute will actually produce, as against the one it intends.

Conclusion

Economics supplies the reasoning; law supplies the sanction. A rule that ignores incentives will not be obeyed, and a market without enforceable rights cannot function at all. The best commercial, constitutional and environmental lawyers are, in practice, applied economists, and the relevance of economics to law is therefore not decorative but operational.

The central proposition

Rent is a differential surplus. It arises because land differs in fertility and in situation, and because the supply of land is fixed. The best land yields more than the poorest land in cultivation at the same cost, and that difference is rent. The poorest land in cultivation, called the marginal land or no-rent land, pays no rent at all.

Assumptions

1. Land differs in fertility and situation.
2. The supply of land is fixed and it has no alternative use (agriculture only).
3. The law of diminishing returns applies to land.
4. Perfect competition prevails.
5. Land is cultivated in the descending order of fertility, the best first.
6. Rent arises from the original and indestructible powers of the soil.
7. A long period is taken, so adjustment is complete.
8. Population growth forces cultivation on to inferior land.
9. There exists no-rent (marginal) land.

Rent on the intensive margin

Rent arises even on land of uniform fertility, because successive doses of labour and capital applied to the same land yield diminishing returns. If the first dose yields 40 quintals, the second 30 and the third 20, and it is worth applying the third, then the third is the marginal dose and the surplus of the first two over it, 20 + 10 = 30 quintals, is rent.

Rent and price: Ricardo's famous conclusion

"Corn is not high because rent is paid, but rent is paid because corn is high."

Rent does not enter into the cost of production and therefore does not determine price. Price is determined by the cost on the marginal land, which pays no rent. Rent is price-determined, not price-determining.

Criticism

1. There are no "original and indestructible" powers. Carey and Marshall pointed out that fertility can be created by manuring and irrigation and destroyed by overuse, as the depletion of groundwater and soil in Punjab shows.

The modern view

Modern economics defines economic rent as any payment to a factor above its transfer earnings, that is, above the minimum it would need to be paid to keep it in its present use. On that view Ricardo was describing a special case of a general phenomenon, and rent is not unique to land at all.

Conclusion

Ricardo's theory survives its criticism because its central insight is sound: where the supply of something is fixed and its quality differs, the better units earn a surplus that is caused by price rather than causing it. The details of fertility, of the order of cultivation and of indestructible powers have all been corrected, but the idea of a differential surplus is permanent.

2. Heavy dependence on agriculture, with an occupational structure that has not changed. Agriculture contributes roughly 18% of Gross Value Added but supports about 45% of the workforce. That gap between the share of output and the share of employment is the defining structural distortion of the Indian economy and the direct cause of low labour productivity.

3. Unemployment and underemployment. The characteristic problem is not open unemployment but disguised unemployment in agriculture, where more people work the land than the land requires, together with seasonal unemployment and a very large informal sector offering no security.

4. Low rate of capital formation. Low incomes produce low savings, low savings produce low investment, and low investment perpetuates low incomes. This is Ragnar Nurkse's vicious circle of poverty, and it operates on both the demand and the supply side of capital.

5. Poverty and inequality. Poverty has fallen substantially, on the multidimensional measure from 24.85% in 2015-16 to 14.96% in 2019-21, but persists, and inequality of income and of assets, particularly land, remains high.

6. Low level of technology in large parts of the economy, coexisting with world-class capability in others.

C. Features of the post-1991 economy

13. Liberalisation, privatisation and globalisation (LPG). Licensing dismantled, tariffs cut, foreign investment welcomed, the rupee made convertible on the current account in 1994.

14. A services-led structure. Services contribute more than half of Gross Value Added, an unusually high share for a country at India's income level, since most economies industrialise before moving to services.

15. Growing external integration: trade at roughly three times its 1990 share of GDP, foreign exchange reserves above 700 billion US dollars, and the world's largest inflow of remittances.

16. A demographic dividend, a large and young working-age population, which is an advantage only if educated, healthy and employed.

17. Rapid digital and financial inclusion, through Jan Dhan, Aadhaar, mobile connectivity, UPI and Direct Benefit Transfer.