BLS LLB 5 Years Sem 1 Economics 2023-24 - ATKT Set 2 60/40 Question Paper with Solutions

Normative economics is the branch of economics that deals with what ought to be: it makes value judgments about whether an economic situation or policy is good or bad, desirable or undesirable, fair or unfair.

Its statements are statements of opinion or of prescription, and they cannot be verified by evidence alone, because they rest on what one values.

Examples: "The government ought to reduce the tax on petrol." "Inequality in India is too high." "Free education should be provided to every child."

Cross elasticity of demand measures the responsiveness of the quantity demanded of one commodity to a change in the price of another commodity.

Cross elasticity (Ec) = Percentage change in quantity demanded of X ÷ Percentage change in price of Y

Its sign tells you the relationship between the two goods:

1. Positive (Ec > 0): substitutes. A rise in the price of tea raises the demand for coffee. The higher the coefficient, the closer the substitutes.
2. Negative (Ec < 0): complements. A rise in the price of petrol lowers the demand for cars.
3. Zero (Ec = 0): unrelated goods. A change in the price of salt does not affect the demand for shoes.

Example: if the price of tea rises by 10% and the demand for coffee rises by 20%, Ec = 20 ÷ 10 = +2, so the two are close substitutes.

An entrepreneur is the person who organises the other factors of production, land, labour and capital, bears the risk and uncertainty of the business, and takes the profit or loss that results.

Two qualities:

1. Willingness to bear risk and uncertainty. This is the defining quality. Wages, rent and interest are contracted in advance and paid whatever happens; the entrepreneur's reward is only what is left, and it may be negative. Frank Knight distinguished insurable risk from uninsurable uncertainty, and held that profit is the reward for bearing the second.
2. Ability to innovate and to decide. The entrepreneur introduces a new product, a new method, a new market or a new form of organisation, and takes the decisions on what to produce, how much and by what technique. Joseph Schumpeter called this "creative destruction" and treated the innovator as the engine of economic development.

The money market deals in short-term funds; the capital market deals in long-term funds.

Two differences:

Two further differences: the money market is regulated chiefly by the RBI and the capital market by SEBI; and money market instruments carry low risk and low return and serve liquidity, while capital market instruments carry higher risk and higher return and serve investment.

Disinvestment means the sale by the government of a part of its equity holding in a public sector undertaking to private investors or to the public.

Its two forms:

1. Minority disinvestment, where the government sells a stake but retains ownership and management control, holding more than 51%.
2. Strategic disinvestment or privatisation, where the government sells a controlling stake together with management control, so ownership passes to the buyer.

Its objectives: to raise revenue and reduce the fiscal deficit, to improve efficiency by exposing the undertaking to market discipline, to widen public shareholding, and to withdraw the State from purely commercial activity.

Example: the sale of Air India to the Tata Group in January 2022 is strategic disinvestment; the successive public offers of LIC and of the oil companies are minority disinvestment.

The poverty line is the minimum level of income or consumption expenditure needed to secure a socially acceptable minimum standard of living. A person whose expenditure falls below it is counted as poor, and the proportion of the population below it is the head count ratio.

In India it has been fixed on a calorie norm: 2,400 calories per person per day in rural areas and 2,100 in urban areas, the difference reflecting the heavier physical work done in the countryside. That calorie requirement is then converted into a money value at current prices.

The committees that have fixed it: the Lakdawala Committee (1993), the Tendulkar Committee (2009), whose estimate is the one most often quoted, and the Rangarajan Committee (2014), which raised the line and therefore the count.

Meaning

The terms were introduced by the Norwegian economist Ragnar Frisch in 1933. They come from the Greek mikros, small, and makros, large.

Microeconomics studies the economic behaviour of individual units: a consumer, a firm, a household, a single industry, the market for one commodity.

Macroeconomics studies the economy as a whole: national income, total employment, the general price level, aggregate demand and supply.

Points of distinction

Interdependence

The two are not rivals but complements. Macroeconomic aggregates are built up from microeconomic units, and microeconomic decisions are taken within a macroeconomic environment: a firm's investment decision depends on the interest rate, which is a macro variable. Paul Samuelson compared them to two blades of a pair of scissors, neither of which cuts alone.

• 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.

What is meant by population explosion

Population explosion is a sudden and very rapid increase in population, caused by the death rate falling sharply while the birth rate stays high. India's population has risen from about 36 crore in 1951 to more than 140 crore, making it the world's most populous country.

Causes

A. Causes on the side of high birth rate

1. Universal and early marriage. Marriage is nearly universal in India and, despite the Prohibition of Child Marriage Act, 2006, which fixes the minimum age at 18 for women and 21 for men, a substantial proportion of women still marry early. An earlier marriage means a longer reproductive span and more children.

2. Poverty. A poor household treats children as earning hands and as old-age security, since there is no pension. The poorer the family, the greater the incentive to have more children, which is why fertility is highest among the poorest.

10. Fall in infant mortality, through immunisation, institutional delivery and better maternal care. This has a second effect: parents who expect their children to survive choose to have fewer.

11. Control of famine. The Green Revolution ended famine deaths and secured the food supply.

12. Better sanitation, safe drinking water and nutrition, and rising life expectancy, which has more than doubled since independence.

C. Other causes

13. Immigration from neighbouring countries into the border States.

The position today

The picture has changed and an answer that ignores this is out of date. India's total fertility rate has fallen to about 2.0, below the replacement level of 2.1, according to the National Family Health Survey (2019-21). Population is still rising, but chiefly because of population momentum: the very large number of people already of reproductive age. Kerala and Tamil Nadu reached replacement fertility decades ago.

2. Prohibiting fraudulent and unfair trade practices, including price rigging and the circulation of misleading information.
3. Requiring disclosure by companies of all material information, so that investors decide on facts.
4. Regulating the issue of securities, so that a prospectus is complete and not misleading.
5. Investor education and awareness, and running the SCORES grievance redressal platform.
6. Regulating takeovers so that minority shareholders receive a fair exit.

B. Regulatory functions

1. Registering and regulating intermediaries: stock brokers, sub-brokers, merchant bankers, registrars, portfolio managers, investment advisers and credit rating agencies.
2. Registering and regulating mutual funds and collective investment schemes.
3. Framing regulations and a code of conduct for the market and its participants.
4. Conducting inquiry, inspection and audit of stock exchanges and intermediaries.

C. Developmental functions

Solution table

Specimen working, for 4 units

1. TVC = 0 + 30 + 30 + 20 = ₹80
2. TFC = ₹100 (unchanged at every output)

Why the two subjects meet

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. That is why economics is taught in the first semester of a five-year law course.

The points of relevance

1. Property, contract and succession are allocation rules. The law of property decides who owns a scarce resource, the law of contract governs its voluntary transfer, and the law of succession governs its transfer on death. These are economic functions expressed in legal form.

5. Damages are an economic calculation. Loss of profits, loss of earning capacity, mitigation and the discounting of future losses to present value are economics applied by courts every day.

6. Regulation answers market failure. SEBI, TRAI, the RBI and the electricity commissions exist because markets fail in identifiable ways: information asymmetry, natural monopoly, public goods and externalities. A lawyer who cannot name the failure cannot argue about the remedy.

7. Constitutional adjudication. Testing a restriction on trade under Article 19(6) against the freedom in Article 19(1)(g) requires an assessment of economic consequence, and the Directive Principles, especially Articles 38, 39 and 43, are economic objectives in constitutional form.

8. Law and Economics as a school of jurisprudence. Founded by Ronald Coase in The Problem of Social Cost (1960) and developed by Richard Posner in Economic Analysis of Law (1973), it tests a legal rule by the efficiency of the outcome it produces. The Coase theorem holds that where transaction costs are low the parties will bargain to an efficient outcome whoever holds the right initially, which applies directly to nuisance, easements and property disputes.

Their importance first

Small scale industries, classified since the MSMED Act, 2006 as Micro, Small and Medium Enterprises (MSMEs), contribute roughly 30% of India's GDP and about 45% of its exports, and employ on the order of 11 crore people, second only to agriculture. Their problems are therefore a national problem, not a sectoral one.

The problems

1. Shortage of finance. The central problem. Banks demand collateral a small unit does not have, credit appraisal is designed for large borrowers, and the unit falls back on moneylenders at very high rates.

2. Delayed payments. Large buyers and government departments pay late, which strangles working capital. Section 15 of the MSMED Act requires payment within 45 days and provides for compound interest at three times the RBI bank rate on default, but enforcement against a large customer risks the relationship, so units rarely invoke it.

10. Excessive regulation and compliance cost. Multiple registrations, inspections and returns absorb the time of a proprietor who has no compliance department, and compliance costs the same in absolute terms for a small unit as for a large one.

11. Sickness. The combined effect of the above is a very high rate of industrial sickness and closure.

Government measures

The MSMED Act, 2006 and the revised classification effective 1 July 2020, a composite criterion of investment and turnover with the manufacturing and service distinction abolished; priority sector lending and the CGTMSE credit guarantee scheme, which lends without collateral; the Emergency Credit Line Guarantee Scheme during the pandemic; the Udyam registration portal; TReDS for discounting receivables; public procurement policy reserving a share of government purchases for MSMEs; and the Samadhaan portal for delayed payments.

3. Settling disputes. Its Dispute Settlement Body hears complaints that a member has broken the rules and authorises retaliation where a ruling is not complied with. This is the WTO's most distinctive role and is discussed below.

4. Reviewing trade policies. The Trade Policy Review Mechanism examines each member's policies periodically, which makes them transparent and predictable to traders in other countries.

5. Technical assistance and capacity building for developing and least-developed members.

6. Cooperating with the IMF and the World Bank so that trade, monetary and development policy pull in the same direction.

The principles it enforces

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 inside the market; binding tariff commitments; transparency; and special and differential treatment for developing countries.

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.

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.

7. Infrastructure deficits in power, transport, storage and logistics, all improving from a low base.

8. Population pressure. A very large population, though the total fertility rate has fallen to about 2.0, below the replacement level of 2.1, so growth now comes chiefly from momentum.

D. Features of the post-1991 economy

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

15. 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.

16. 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.

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

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

Meaning of demand

Demand in economics is not merely a desire. It is the quantity of a commodity that a consumer is willing and able to buy at a given price during a given period of time. It therefore requires three things together: desire, ability to pay and willingness to pay. A beggar's desire for a car is not demand.

Statement of the law

The law was stated by Alfred Marshall in Principles of Economics (1890):

"The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price and diminishes with a rise in price."

In short: other things remaining equal, the quantity demanded of a commodity varies inversely with its price.

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

7. No change in climate or season.
8. The commodity is not a prestige or status good.

If any assumption fails, the entire demand curve shifts, and what is being observed is not a test of the law at all.

Why the demand curve slopes downward

1. Law of diminishing marginal utility. Each successive unit yields less satisfaction, so a buyer takes more only at a lower price. This is the fundamental reason.
2. Income effect. A fall in price raises the consumer's real income, so more can be bought.
3. Substitution effect. A fall in the price of one good makes it cheaper relative to substitutes, so buyers switch to it.
4. New buyers enter the market at the lower price.
5. Multiple uses. A cheaper commodity is put to uses not worth it at the higher price.

6. Speculative demand in share and commodity markets, where a rising price attracts more buyers.

7. Emergency and abnormal conditions: war, famine, or panic buying, as in the early COVID-19 lockdown.

8. Change in fashion. A good that has gone out of fashion will not sell even at a reduced price.

Importance of the law

For the consumer it explains buying behaviour; for the producer it guides pricing and output decisions; for the government it underlies taxation, price control and public distribution, since a tax on an inelastic good raises revenue reliably while a tax on an elastic good drives demand away.

Foreign exchange reserves fell to roughly two weeks of imports, India pledged gold with the Bank of England and the Union Bank of Switzerland, and the country approached the IMF. The response was devaluation of the rupee in July 1991, an IMF programme and the New Economic Policy of liberalisation, privatisation and globalisation. The rupee was made convertible on the current account in 1994.

The problems since the 1990s

1. A persistent and widening merchandise trade deficit. Imports of goods have grown faster than exports throughout the period. This is the core problem and it has never been solved.

2. Dependence on imported crude petroleum. Crude is the largest single import and India imports the great majority of what it consumes. Demand for it is price inelastic in the short run, so a rise in world prices raises the import bill immediately with no offsetting fall in quantity. Every major BoP scare since 1991, in 2008, in 2012-13 and in 2022, has had an oil price spike behind it.

3. Gold imports. Gold is bought as a store of value rather than for production, so it adds to the deficit without adding to capacity, and it drew successive attempts at restriction.

9. External shocks outside India's control: the Asian crisis of 1997, sanctions after the 1998 nuclear tests, the 2008 crisis, the COVID-19 collapse in trade in 2020 and the Russia-Ukraine war in 2022, which raised energy and fertiliser prices together.

What has improved

1. The services surplus. Software, business and professional services now earn a very large surplus that offsets much of the goods deficit. This is the single most important structural change.

2. Remittances. India is the world's largest recipient of remittances, and these are stable: they do not flee in a crisis the way portfolio money does.

3. Reserves, which rose from about two weeks of imports in 1991 to over 700 billion US dollars, which is why recent shocks caused pressure rather than crisis.

4. The quality of financing. A far larger share of the deficit is now met by foreign direct investment, which is long-term and cannot be withdrawn overnight.

5. A managed float. The RBI smooths volatility without defending a fixed rate, which avoids the trap that destroyed the 1991 position.

Why the question matters

Agriculture supports about 45% of India's workforce while producing roughly 18% of Gross Value Added. That gap is the arithmetic of rural poverty: too many people are sharing too little output. The constraints below explain why, and they fall into four groups.

A. Constraints of land and holding

1. Small and fragmented holdings. The average operational holding is about 1.08 hectares, and more than 86% of holdings are small or marginal. A holding that small cannot support a tractor, a tube well or a bank loan, and the plots are often scattered, which wastes time and boundaries. The cause is the law of inheritance operating on land over generations, and consolidation of holdings has been attempted with limited success outside Punjab and Haryana.

2. Insecure tenancy and unclear title. A tenant who may be evicted will not invest in the land, and unclear records make land a poor security for credit. Land records digitisation and model tenancy laws address this only partly.

C. Constraints of capital, marketing and price

8. Inadequate institutional credit and rural indebtedness. Despite priority sector lending, Kisan Credit Cards and cooperative banks, a substantial share of small farmers still borrow from moneylenders at very high rates. Indebtedness is the background to the persistent problem of farmer suicides.

9. Defective marketing. The farmer sells at the village or the mandi through a chain of intermediaries, each taking a margin, so the share of the consumer's rupee reaching the farmer is low. e-NAM, the electronic national market, and reform of the APMC system address this, but the intermediary chain remains.

10. Absence of storage and cold chain. Post-harvest losses are very large, particularly in fruit and vegetables, so the farmer must sell immediately after harvest when prices are lowest.

11. Price volatility and low remunerative prices. Minimum support prices are announced for many crops but are effective mainly for wheat and rice and mainly in a few States, so most farmers sell below MSP.

12. Lack of crop insurance penetration, despite the Pradhan Mantri Fasal Bima Yojana.

Measures being taken

Irrigation under the Pradhan Mantri Krishi Sinchayee Yojana with micro-irrigation; soil health cards; PM-KISAN income support; PMFBY crop insurance; e-NAM and APMC reform; Kisan Credit Cards and priority sector lending; Farmer Producer Organisations to give small farmers scale in buying and selling; promotion of horticulture, dairy and allied activities, which raise income per hectare; and food processing and cold chain investment.

Conclusion

India's agricultural constraints are not mainly about output. The country is self-sufficient in food grain and exports rice. They are about income: too many people on too little land, selling into a market that gives them a small share of the final price, with water running out beneath them. The remedies therefore have to work on three fronts at once, raising yields, improving the terms on which the farmer sells, and moving people out of farming into other work.