BLS LLB 5 Years Sem 1 Economics 2025-26 - ATKT 60/40 Question Paper with Solutions

Opportunity cost is the value of the next best alternative forgone when a choice is made. Because resources are scarce and have alternative uses, choosing one option always means giving up another, and the cost of the decision is what was given up.

It is also called alternative cost or transfer earnings, and the idea was developed by the Austrian economist Friedrich von Wieser.

Examples:

1. A student who spends an evening studying Economics gives up the evening's earnings from a part-time job. If the job paid ₹500, the opportunity cost of studying is ₹500.
2. If the government uses a plot of land for a hospital, the opportunity cost is the school that could have stood there instead.
3. A law graduate who joins litigation at ₹30,000 a month, having refused a corporate job at ₹80,000, bears an opportunity cost of ₹80,000 a month.

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 classified as:

1. Revenue expenditure (recurring, creating no asset): salaries, pensions, interest payments, subsidies.
2. Capital expenditure (creating an asset): roads, bridges, schools, defence equipment.

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

Public debt is the total borrowing of the government, incurred when expenditure exceeds revenue. It is classified as:

1. Internal debt, raised within the country from banks, financial institutions and the public through instruments such as government securities and treasury bills.
2. External debt, raised from foreign governments, the IMF, the World Bank and other international lenders.

The capital market is the market for medium and long-term funds, that is funds for more than one year. It brings together those who have savings to invest and those who need long-term capital, chiefly companies and the government.

Its two segments are:

1. Primary market (new issue market): where securities are issued for the first time, through public issues, rights issues and private placement.
2. Secondary market (stock exchange): where existing securities are bought and sold, giving the investor liquidity. In India, the Bombay Stock Exchange and the National Stock Exchange.

Its instruments are shares, debentures, bonds and government securities. It is regulated by the Securities and Exchange Board of India (SEBI), established in 1988 and given statutory powers by the SEBI Act, 1992.

Its significance:

1. It mobilises savings and channels them into productive investment.

Economics is relevant to a law student for four reasons:

1. Both subjects deal with scarcity. Economics explains how scarce resources are allocated; law creates and enforces the rights that make that allocation binding. The law of property and the law of contract are allocation rules expressed in legal form.
2. Economic legislation cannot be applied without economics. The Competition Act 2002, the Consumer Protection Act 2019 and the Insolvency and Bankruptcy Code 2016 rest on the concepts of market, monopoly, cost and solvency. A lawyer who does not understand a relevant market cannot argue a dominance case.
3. Law and Economics is itself a school of legal thought. 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.
4. Constitutional adjudication requires it. When a court tests a restriction on trade under Article 19(6) against the freedom guaranteed by Article 19(1)(g), it is weighing an economic consequence.

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

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

Its types, with examples:

An entrepreneur is the factor of production that organises the other three factors, land, labour and capital, initiates production, takes the decisions of the business and bears the risk and uncertainty of it. The reward of the entrepreneur is profit, which, unlike rent, wages and interest, is not contractually fixed and may be negative.

Functions of an entrepreneur:

1. Initiating and organising the business.
2. Decision-making: what to produce, how much, by what technique, where.
3. Innovation: introducing new products, processes, markets or sources of supply.
4. Risk and uncertainty bearing, which is the distinctive function.
5. Coordination and supervision of the other factors.

Gross Domestic Product (GDP) is the total money value of all final goods and services produced within the geographical boundaries of a country during an accounting year, regardless of whether the producer is a resident or a foreigner.

Three elements define it: final goods only (to avoid double counting), produced within the domestic territory, in one year.

Its formulae:

1. Expenditure method:

GDP = C + I + G + (X − M)

where C is private final consumption expenditure, I is gross domestic capital formation (investment), G is government final consumption expenditure, X is exports and M is imports.

2. Value added (product) method:

GDP = Sum of the gross value added by all producing units in the economy

3. Income method:

Every economy, whatever its political system, faces three central problems of allocation, because resources are scarce and wants are unlimited. They were set out by Paul Samuelson.

1. What to produce, and in what quantities? Society must choose between competing uses of the same resources. The classic illustration is "guns or butter": land, labour and capital used to make defence equipment cannot simultaneously make consumer goods. A government deciding between spending on defence and on health is answering this question.

2. How to produce? Society must choose the technique. A road may be built by labour-intensive methods, employing many workers with simple tools, or by capital-intensive methods using machinery. A labour-surplus economy like India often prefers the former to generate employment.

5. Technical assistance and training for developing countries.
6. Cooperation with the IMF and the World Bank for coherence in global economic policy.

Governing principles

1. Most Favoured Nation (MFN): a concession granted to one member must be extended to all.
2. National Treatment: imported goods must be treated no less favourably than domestic goods once inside the market.
3. Binding tariff commitments and their progressive reduction.
4. Transparency, requiring members to publish and notify their trade rules.
5. Special and differential treatment for developing countries.

Main agreements

GATT for goods, GATS for services, TRIPS for intellectual property, the Agreement on Agriculture, and the agreements on anti-dumping, subsidies and safeguards.

How the WTO helps India

What SEBI is

The Securities and Exchange Board of India (SEBI) is the regulator of the Indian securities market. It was established in 1988 as a non-statutory body and given statutory status by the SEBI Act, 1992, following the Harshad Mehta securities scam which exposed how weak market supervision then was. Its headquarters are at Mumbai.

Its preamble states its three objects: to protect the interests of investors in securities, to promote the development of the securities market, and to regulate it.

Its importance

1. Protection of investors. This is its first statutory object. It requires full disclosure in prospectuses, prohibits fraudulent and unfair trade practices, runs the SCORES platform for investor grievances, and maintains an Investor Protection and Education Fund.

2. Prohibition of insider trading. Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, trading on unpublished price-sensitive information is prohibited, and companies must maintain codes of conduct and structured digital databases.

Conclusion

SEBI's importance lies in confidence. A capital market cannot mobilise household savings unless the ordinary investor believes the market is fair, and every one of SEBI's functions is directed at sustaining that belief.

Examples

Positive statements:

1. "India's GDP grew by 8.2% in 2023-24."
2. "A rise in the price of petrol reduces the quantity demanded."
3. "Unemployment in rural India is higher than in urban India."

Normative statements:

1. "The government should raise the minimum wage."
2. "Income inequality in India is too high."
3. "The poor ought to receive free healthcare."

The law of demand

The law of demand states that, other things remaining equal, the quantity demanded of a commodity varies inversely with its price: as price rises demand falls, and as price falls demand rises. The demand curve therefore slopes downward from left to right.

The exceptions are cases in which demand rises with price, so the demand curve slopes upward.

The exceptions

1. Giffen goods. Strongly inferior goods that take a large share of a poor household's budget. When the price rises, the household is so much poorer in real terms that it abandons the costlier substitute and buys still more of the cheap staple. Named after Sir Robert Giffen, whose observation of bread among nineteenth-century English labourers was reported by Alfred Marshall (1890). Example: coarse cereals such as bajra or jowar for a very poor family.

7. Emergency and abnormal conditions. During war, famine or panic, people buy more even at higher prices. Example: hoarding of essential goods during 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.

Conclusion

These are exceptions in appearance rather than in principle. In most of them the assumption "other things remaining equal" has been violated: expectations, information or income have changed, not merely the price. The Giffen good is the only genuine theoretical exception, and even that is disputed.

What are the advantages and disadvantages for consumers in such a market?

What market structure this is

The facts describe monopolistic competition with a dominant firm, and the features named in the question are precisely the features of that structure:

1. Many sellers: smaller brands exist, so this is not a pure monopoly, where there would be a single seller and no substitutes at all.
2. Product differentiation: the goods are similar but not identical, and the difference is created by branding and advertising rather than by any difference in the toothpaste itself.
3. Selling costs: heavy expenditure on advertisement is the defining cost of this structure and does not exist in perfect competition.

4. Brand as a guarantee of quality: a firm with a reputation to protect has a strong incentive to maintain standards, which matters for a product used daily.
5. Availability and distribution: a large firm reaches shops a small one cannot.

Disadvantages for consumers

1. Higher prices: price exceeds marginal cost, so consumers pay more than they would in perfect competition. The question states exactly this.
2. The cost of advertising is passed on: selling costs are recovered in the price, so consumers pay for the persuasion used on them.
3. Excess capacity: firms in monopolistic competition operate below the lowest point of the average cost curve, so resources are used inefficiently and output is lower than it could be.
4. Brand loyalty reduces price sensitivity, weakening the discipline competition would otherwise impose.

Given

Formula

Ep = percentage change in quantity demanded ÷ percentage change in price
Ep = (ΔQ ÷ Q) × 100 ÷ (ΔP ÷ P) × 100

Calculation

Percentage change in quantity:

ΔQ ÷ Q = 200 ÷ 300 = 0.6667, that is +66.67%

Percentage change in price:

ΔP ÷ P = −50 ÷ 200 = −0.25, that is −25%

2. Cinema tickets are not a necessity. They are a discretionary entertainment expense with close substitutes: streaming at home, a different cinema, or simply not going.
3. The manager's decision was correct. Because demand is elastic, cutting the price was the revenue-maximising move, and raising it would have reduced revenue.
4. It follows that the hall should compete on price in this range, through discounted mornings, weekday rates and student concessions, rather than raising prices.

4. It advances equity and a constitutional obligation. The right to health has been read into the right to life under Article 21, and Article 47 directs the State to raise the level of nutrition and public health.

5. It releases household income for food, education and saving.

6. It reduces child and maternal mortality through institutional delivery, immunisation and antenatal care.

India's principal scheme is Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (2018), which provides health cover of ₹5 lakh per family per year for secondary and tertiary hospitalisation to the poorest households, and was extended in 2024 to all citizens aged 70 and above regardless of income.

(b) Economic challenges

1. Fiscal burden. Universal free treatment is expensive and recurring. India's public health expenditure has long been around 2% of GDP, against the National Health Policy 2017 target of 2.5%, so financing an expansion means either higher taxes or borrowing.

2. Opportunity cost. Money spent on health is not spent on education, infrastructure or defence. Public finance is a choice among competing claims.

Conclusion: the policy is justified on grounds of equity, human capital and constitutional obligation, but it must be paired with investment in supply, that is doctors, hospitals and drugs, with strong targeting and with audit against fraud, or the entitlement will exist on paper without the service existing in fact.

3. Information asymmetry. The insiders knew more than the outside investor. This is the central problem of securities regulation: without correction, the informed party always profits at the expense of the uninformed, and the uninformed eventually leave the market.

4. Weak corporate governance in small listed companies. Smaller companies often have concentrated promoter holdings, weak boards and ineffective audit committees, so internal checks fail.

5. Price manipulation and volatility in illiquid small-cap stocks, where a small volume of trading can move the price sharply.

6. Vulnerability of the retail investor, who lacks the research capacity of an institution and often invests savings that cannot be replaced.

Other measures worth naming: the SCORES online grievance redressal platform; the Investor Protection and Education Fund; SEBI's surveillance systems, including the Additional Surveillance Measure and Graded Surveillance Measure for volatile small-cap stocks; compulsory dematerialisation and settlement guarantees; investor awareness programmes; and the right of appeal to the Securities Appellate Tribunal.

Advice to Ravi himself

Diversify rather than concentrate savings in a single small company; prefer mutual funds where professional research and diversification are built in; read disclosures before investing; and use the SCORES platform to complain.

Introduction

India's foreign trade was transformed by the economic reforms of 1991, introduced under Prime Minister P. V. Narasimha Rao and Finance Minister Dr Manmohan Singh in response to a balance of payments crisis in which foreign exchange reserves had fallen to roughly two weeks of imports. The policy changed from import substitution to export promotion and integration with the world economy.

The pre-1991 position

Trade was tightly controlled: high tariffs, some of the highest in the world; quantitative restrictions and import licensing; a strictly regulated foreign exchange regime under the Foreign Exchange Regulation Act (FERA), 1973; an emphasis on self-sufficiency; and a very small share of world trade.

4. Change in the composition of exports. This is the most important structural change. Exports shifted from primary commodities (tea, jute, cotton, spices, raw materials) to manufactured goods and high-value products: engineering goods, petroleum products, gems and jewellery, pharmaceuticals, chemicals and textiles. India became a significant exporter of refined petroleum despite importing the crude, which is value addition in its clearest form.

5. The rise of services exports. Software and business services grew from almost nothing in 1991 to India's largest single export category. This is the defining change of the period: India became a major exporter of services before it became a major exporter of manufactures, which is unusual among developing economies. It is why India runs a large deficit on merchandise trade and a large surplus on services.

6. Change in the composition of imports. Imports shifted towards crude petroleum, gold, electronic goods, capital goods and raw materials, and away from food grains, which India had imported in the 1960s and now exports. Increasing imports of capital goods indicate industrial investment rather than consumption.

Assessment

The gains are real: a far more open economy, a diversified export basket, world-class services exports and comfortable foreign exchange reserves in place of the crisis of 1991. The weaknesses are equally real: a persistent merchandise deficit, heavy dependence on imported crude and on China for intermediate goods and electronics, a small share of world merchandise trade relative to India's size, and manufacturing exports that have not grown as fast as services.

3. Capital gains tax on the profit from transfer of a capital asset.
4. Wealth tax, abolished in 2015; estate duty and gift tax, abolished earlier.

B. Indirect taxes

An indirect tax is levied on one person but its burden is shifted to another, usually the final consumer. Administered by the Central Board of Indirect Taxes and Customs.

1. Goods and Services Tax (GST), which now subsumes most indirect taxes.
2. Customs duty on imports and exports.
3. Excise duty, retained on petroleum products and alcohol, which remain outside GST.
4. Stamp duty and State excise, levied by the States.

C. Structure of GST

• CGST levied by the Union and SGST by the State on intra-State supply;
• IGST on inter-State supply, collected by the Union and apportioned;
• rate slabs of 0%, 5%, 12%, 18% and 28%, with a compensation cess on certain goods.

6. State-level VAT (from 2005). States replaced sales tax with value added tax, again to remove cascading within the State.

7. Goods and Services Tax (1 July 2017). The largest indirect tax reform since independence, introduced by the Constitution (One Hundred and First Amendment) Act, 2016. It subsumed central excise, service tax, State VAT, octroi, entry tax, luxury tax and others into a single tax, created a common national market, allowed input tax credit across the chain, and established the GST Council as a joint forum of the Union and the States.

8. Administrative and procedural reform. Permanent Account Number and its linkage with Aadhaar; expansion of TDS and TCS; electronic filing and electronic payment; faceless assessment and faceless appeals (2020), which remove personal contact between the taxpayer and the officer; and the Document Identification Number system.

9. Anti-avoidance measures. The General Anti-Avoidance Rules (GAAR), effective from 2017; transfer pricing provisions; and the Black Money (Undisclosed Foreign Income and Assets) Act, 2015.

10. Dispute resolution. The Vivad se Vishwas scheme to settle pending direct tax disputes; and the Authority for Advance Rulings.

The four factors and their rewards

Production requires the combination of four factors, each of which earns a reward. The study of how those rewards are determined is the theory of distribution.

2. Labour and wages

Characteristics: labour is inseparable from the labourer, perishable (a day not worked is lost forever), and has weak bargaining power individually.

Wages are of two kinds: nominal (money) wages, the amount paid in rupees, and real wages, the goods and services that amount will buy, which also include working conditions and non-monetary benefits.

Theories:

1. Subsistence theory (the "iron law of wages", Ricardo): wages tend to the minimum needed for subsistence, since higher wages raise population and bring wages down again.
2. Wages fund theory (J. S. Mill): wages equal a fixed fund divided by the number of workers.
3. Marginal productivity theory (J. B. Clark): a worker is paid the value of the marginal product of labour, since an employer will hire up to the point where the addition to revenue equals the wage.
4. Modern theory: wages are determined by the demand for and supply of labour, modified by collective bargaining, trade unions and legislation.

2. Loanable funds theory (Wicksell, Robertson): interest is determined by the demand for and supply of loanable funds, including bank credit and dishoarding, not saving alone.
3. Liquidity preference theory (J. M. Keynes, General Theory, 1936): interest is the reward for parting with liquidity, determined by the demand for money, arising from the transactions, precautionary and speculative motives, and the supply of money fixed by the central bank.

Example: a company issuing debentures pays interest to the holders for the use of their funds; the rate reflects the RBI's policy rate and the company's credit standing.

4. Entrepreneur and profit

Profit is the residual left after rent, wages and interest have been paid. It is unique among the rewards because it is not contractual, is uncertain, and can be negative.

Theories:

1. Risk-bearing theory (F. B. Hawley): profit is the reward for bearing risk.

Meaning

Poverty is a condition in which a person is unable to secure the minimum requirements of food, clothing, shelter, education and health. It is measured against the poverty line, the level of consumption expenditure needed to buy those necessities, and the proportion below it is the head count ratio.

In India the line has been fixed by the Tendulkar Committee (2009) at about ₹27.20 per person per day in rural areas and ₹33.30 in urban areas at 2011-12 prices, giving a ratio of 21.9%, and by the Rangarajan Committee (2014) at about ₹32 and ₹47, giving 29.5%.

Poverty is now also measured multidimensionally. NITI Aayog's National Multidimensional Poverty Index, built on the Alkire-Foster method, counts deprivation in health, education and standard of living, and recorded a fall from 24.85% in 2015-16 to 14.96% in 2019-21.

Major causes of poverty in India

A. Economic causes

2. Large family size among the poorest, which lowers per capita consumption within the household.

C. Social causes

1. Illiteracy and lack of skills, which confine workers to low-paid casual work.
2. The caste system and social exclusion, which restrict access to land, education and occupations, so poverty is concentrated among Scheduled Castes and Scheduled Tribes.
3. Gender inequality, which keeps female labour force participation low.
4. Poor health and nutrition, which reduce earning capacity and create a trap: poverty causes ill health and ill health deepens poverty.

D. Structural and historical causes

1. Unequal distribution of assets, particularly land, so the benefits of growth accrue to those who already own.

4. Food security. The National Food Security Act, 2013 gives subsidised grain to about two-thirds of the population through the public distribution system, supplemented by the Pradhan Mantri Garib Kalyan Anna Yojana during the pandemic.

5. Education and skilling. Universal schooling under the Right to Education Act, 2009, mid-day meals, and vocational training through the Skill India Mission and PMKVY.

6. Health. Ayushman Bharat PM-JAY, providing ₹5 lakh of hospitalisation cover a year, addresses the medical expenditure that pushes families into poverty.

7. Housing and basic services. Pradhan Mantri Awas Yojana, and the sanitation, electricity, cooking gas and drinking water missions, which raise the real income of poor households even where cash income is unchanged.

8. Financial inclusion and direct transfers. Jan Dhan accounts, Aadhaar and mobile connectivity together allow Direct Benefit Transfer, reducing leakage by paying beneficiaries directly.

9. Population control through education, particularly of women, and family welfare services.

10. Land reform and asset redistribution, including secure tenancy rights and effective implementation of ceiling laws.