BLS LLB 5 Years Sem 1 Economics 2017-18 Question Paper with Solutions

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.

Three things are essential to the definition: a price, since supply without a price is meaningless; a period of time, since supply is a flow and not a stock; and willingness together with ability to sell.

The law of supply states that, other things remaining equal, the quantity supplied varies directly with price: a higher price brings a larger supply. The supply curve therefore slopes upward from left to right.

In economics land means all the free gifts of nature: not only the soil but also water, forests, minerals, sunlight and climate, everything given by nature and not produced by human effort.

Two characteristics:

1. Land is a free gift of nature. It is not produced by human labour, so unlike capital it has no cost of production. This is why the whole of its return is treated as a surplus, which is Ricardo's account of rent.
2. The supply of land is fixed. Its total quantity cannot be increased however high the price, so its supply is perfectly inelastic to society as a whole.

Two further characteristics: land is immobile, it cannot be moved from one place to another, so its situation decides much of its value; and land is permanent and indestructible in the sense that it cannot be consumed away, though its fertility can be exhausted.

Public debt, also called government debt, is the total borrowing of the government, raised to meet expenditure that its revenue does not cover. It is one of the four divisions of public finance, alongside public revenue, public expenditure and financial administration.

Its classification:

1. Internal debt, raised within the country, from the public, banks and the RBI, through government securities, treasury bills and small savings.
2. External debt, raised abroad, from foreign governments and from institutions such as the World Bank and the IMF.

It is also classified as productive, borrowed for projects that yield a return such as irrigation and power, and unproductive, borrowed for war or current consumption; and as redeemable, repayable on a fixed date, and irredeemable.

The capital market is the market for long-term funds, those lent and borrowed for more than one year, in which savings are channelled to those who will invest them in productive assets.

Two of its features:

1. It deals in long-term funds through instruments such as shares, debentures, bonds and government securities, so its purpose is investment rather than liquidity.
2. It has two segments: the primary market, where securities are issued for the first time, and the secondary market, the stock exchanges, where existing securities are traded. The two are inseparable, because an investor will commit money for twenty years only if the shares can be sold tomorrow.

Two further features: it is regulated by SEBI under the SEBI Act, 1992; and it carries higher risk and higher return than the money market. In India the principal exchanges are the BSE, established 1875 and the oldest in Asia, and the NSE, established 1992.

A proportional tax is one levied at the same rate on every taxpayer, whatever the size of the base. The rate stays constant, so the amount of tax rises in exact proportion to income or value, and the ratio of tax to income is the same for rich and poor.

Example: if the rate is 10%, a person earning ₹2 lakh pays ₹20,000 and a person earning ₹20 lakh pays ₹2 lakh. Each has paid one-tenth.

In India: corporation tax is charged at a flat rate and is proportional; so, within any single slab, is GST.

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.

The points of relevance

1. Property, contract and succession are allocation rules. Property decides who owns a scarce resource, contract governs its voluntary transfer, succession its transfer on death.

2. Economic statutes cannot be applied without economics. The Competition Act, 2002 turns on "relevant market" and "dominant position", which require cross elasticity of demand; the Insolvency and Bankruptcy Code, 2016 on solvency and going-concern value; the Consumer Protection Act, 2019 on information asymmetry.

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 (1973), it tests a rule by the efficiency of its outcome. The Coase theorem holds that where transaction costs are low, the parties bargain to an efficient outcome whoever held the right initially.

9. Any law that ignores incentives will be evaded. Rent control below the market reduces the supply of rental housing; licensing creates a scarcity value and therefore corruption.

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.

Examples

Micro: why the price of onions rose this month; how a firm fixes its price. Macro: why India's inflation rate is 5%; how the RBI's repo rate affects national output.

Interdependence

The two are complements, not rivals. Aggregates are built up from individual units, and individual decisions are taken within a macroeconomic environment. Paul Samuelson compared them to two blades of a pair of scissors, neither of which cuts alone.

5. The supply of labour cannot be adjusted quickly. Raising and training a generation takes about twenty years, so labour supply cannot respond to a change in demand the way the supply of a manufactured good can.

6. Labour is mobile, but imperfectly. Movement between occupations is limited by skill, and between places by language, family and cost, which is why wages for similar work differ across India.

7. Labour is both a factor of production and a consumer, so wages are simultaneously a cost to the employer and the demand that sustains the market.

8. The supply curve of labour can be backward bending. Beyond a certain wage a worker may choose leisure over further hours, so a higher wage reduces the hours supplied. No other factor behaves this way.

9. Differences in efficiency. Labour is not homogeneous: workers differ in skill, training, health and attitude, which is why the marginal productivity theory's assumption of homogeneous labour is unreal.

5. Illiteracy, especially female illiteracy. Female education is the strongest predictor of lower fertility anywhere in the world, working through later marriage, better knowledge and use of contraception, greater say within the household and a higher opportunity cost of a woman's time.

6. Preference for a son. Couples continue having children until a son is born, which raises family size directly.

7. Religious and social beliefs, and the view that children are a gift not to be limited.

8. The joint family system, which spreads the cost of an additional child across the household so the parents do not bear it alone.

9. Low status of women and limited participation in paid work.

10. Lack of awareness of and access to contraception, particularly in rural areas.

Demographic causes

11. A young age structure. A very large proportion of the population is of reproductive age, so even at a moderate fertility rate the absolute number of births stays high. This is population momentum.

The rate structure of a tax describes how the rate behaves as the base, usually income, rises. There are four types.

1. Proportional tax

The rate stays the same whatever the size of the base, so tax rises in exact proportion to income and the ratio of tax to income is identical for rich and poor.

Example: corporation tax in India, charged at a flat rate. Merits: simple, certain, easy to calculate and administer, and it does not discourage extra effort. Demerits: it ignores ability to pay, so it takes the same proportion from a household near subsistence as from a wealthy one.

2. Progressive tax

The rate rises as the base rises, so a larger income bears a larger proportion.

4. Digressive tax

Progressive up to a point and proportional beyond it, so the rate rises with income for a while and then stops rising. It is a compromise between equity and the disincentive of high rates.

Summary

4. Reviewing national trade policies under the Trade Policy Review Mechanism, which makes each member's policies transparent and predictable to traders elsewhere.

5. Technical assistance and training for developing and least-developed members.

6. Cooperating with the IMF and the World Bank, so that trade, monetary and development policy are coherent.

7. Enforcing its principles: Most Favoured Nation, a concession to one member must be given to all; National Treatment, imported goods treated no less favourably than domestic goods once inside the market; transparency; binding tariff commitments; and special and differential treatment for developing countries.

India and the WTO

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

Meaning

The law of demand tells us only the direction of the change: when price falls, quantity demanded rises. It does not tell us by how much. Elasticity of demand, developed by Alfred Marshall, supplies that measure.

Price elasticity of demand (Ep) is the degree of responsiveness of the quantity demanded of a commodity to a change in its price.

Ep = Percentage change in quantity demanded ÷ Percentage change in price

The coefficient is negative, since price and quantity move in opposite directions, but by convention the minus sign is ignored and only the magnitude is compared with one.

5. Relatively inelastic demand (Ep < 1). Quantity demanded changes less than proportionately to price. The curve is steeper. Examples: salt, food grains, medicine, petrol, electricity, and habitual goods such as tobacco.

Summary table

The problem in one line

Agriculture supports about 45% of India's workforce while producing roughly 18% of Gross Value Added. That gap is the arithmetic of rural poverty, and the constraints below explain it. 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 justify a tractor, a tube well or a bank loan, and the plots are often scattered. The cause is the law of inheritance operating on land over generations.

2. Insecure tenancy and unclear title. A tenant who may be evicted will not invest in the land, and unclear records make land poor security for credit.

3. Soil degradation, from overuse of chemical fertiliser, monocropping and neglect of organic matter.

10. Price volatility and ineffective support prices. Minimum support prices are announced for many crops but are effective mainly for wheat and rice and mainly in a few States.

D. Constraints of technology, labour and institutions

11. Low mechanisation and outdated technique on holdings too small to justify machinery.

12. Weak extension services, so research does not reach the farmer.

13. Disguised unemployment. More people work the land than the land requires, so the marginal product of labour approaches zero. This is the central constraint, and the remedy lies outside agriculture.

14. Climate change and regional imbalance, the Green Revolution having been concentrated in irrigated States, leaving eastern and rain-fed India far behind.

A note on the zero-output row

At zero output the firm still bears the fixed cost, so TFC is ₹250 and TC is ₹250 even though nothing is produced. That is the whole meaning of a fixed cost.

But AFC, AVC and AC cannot be calculated at zero output, because each divides by Q and division by zero is undefined. Write a dash in those cells and say so in one line; do not write zero. MC at zero output is also undefined, since there is no previous unit to compare with.

Specimen working, for 3 units

1. TFC = ₹250 (unchanged at every output)
2. TVC = AVC × Q = 70 × 3 = ₹210
3. TC = TFC + TVC = 250 + 210 = ₹460
4. AFC = TFC ÷ Q = 250 ÷ 3 = ₹83.33

Determinants of demand

Price of the commodity, which is the subject of the law; income of the consumer; prices of related goods, substitutes and complements; taste and fashion; expectations about future prices; size and composition of population; distribution of income; and climate and season.

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 ↑

The relationship is inverse, and the phrase "other things remaining equal" is not decoration: it is the condition on which the whole law rests.

5. No change in the size and composition of the population.
6. No change in the distribution of income.
7. No change in climate or season.
8. The commodity is not a prestige or status good.
9. The commodity is divisible and available in small units.

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 will take more only at a lower price. This is the fundamental reason, and it links the law of demand to the theory of consumer behaviour.
2. Income effect. A fall in price raises the consumer's real income, so more can be bought out of the same money income.
3. Substitution effect. A fall in the price of one good makes it cheaper relative to its substitutes, so buyers switch to it.

Exceptions to the law

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. This is the only true exception.

2. Veblen goods, or conspicuous consumption. Luxury goods bought for the display of status, where the high price is itself the attraction. Described by Thorstein Veblen in 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 very little with price: salt, life-saving medicine, food grains.

Introduction

India is a developing mixed economy. It has the size and growth rate of a major economy, being among the largest in the world by total GDP, while remaining low in per capita terms. That contrast is the organising fact of the whole subject, and it runs through every feature below.

The features fall into four groups: those of a developing economy, those of a mixed economy, the social features, and the features of the economy as it has been since 1991.

A. Features of a developing economy

1. Low per capita income. Total GDP is large, but divided by a population above 140 crore it leaves per capita income far below that of developed countries. This is the single most important indicator of the standard of living and the primary reason India is classified as developing.

6. Low level of technology in large parts of the economy, coexisting with world-class capability in others: the same country builds space launch vehicles and ploughs with bullocks.

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 rather than from high fertility.

9. Low productivity in agriculture, with holdings averaging about 1.08 hectares, roughly half the cropped area unirrigated, and yields per hectare below those of the leading producers for most crops.

B. Features of a mixed economy

10. Coexistence of the public and private sectors. Both operate side by side, with a joint sector, where ownership is shared, as a third form. Since the New Industrial Policy 1991 the industries reserved for the public sector fell from 17 to a handful.

D. Features of the post-1991 economy

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

19. 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 they move to services.

20. 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.

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

22. Rapid digital and financial inclusion, through Jan Dhan, Aadhaar, mobile connectivity, UPI and Direct Benefit Transfer, which has changed how the State delivers benefits.

23. Higher growth with persistent jobless growth, output rising much faster than employment.

This question has two parts and both carry marks. Answer them under separate headings.

Part 1: Meaning of agricultural productivity

Agricultural productivity is the output obtained per unit of input in agriculture. It measures efficiency, not total output: a country can raise production simply by bringing more land under the plough, and that is not a rise in productivity.

It is measured in several ways, and the difference between the first two is the heart of the Indian problem:

1. Land productivity, output per hectare, usually in quintals or tonnes per hectare. This is what "yield" means, and it is the measure most often quoted.
2. Labour productivity, output per worker engaged in agriculture.
3. Capital productivity, output per unit of capital employed.

1. The Green Revolution. The single most important cause. Under the New Agricultural Strategy of 1966, a package of high-yielding variety (HYV) seeds, chiefly of wheat and rice, together with chemical fertiliser, assured irrigation and pesticides, transformed output. It is associated with Dr M. S. Swaminathan in India and Dr Norman Borlaug internationally, and it took India from importing food grain under the American PL-480 programme to self-sufficiency.

2. Improved and hybrid seeds, and more recently drought-resistant and climate-resilient varieties, developed by the ICAR system and the agricultural universities.

3. Chemical fertiliser and better plant protection, which raised yields sharply where water was available.

4. Mechanisation, tractors, threshers, harvesters and pump sets, which raised output per worker and made timely operations possible.

5. Scientific practices: crop rotation, multiple cropping, soil testing through soil health cards, and integrated pest management.

B. Irrigation and infrastructure

12. Marketing reform, through regulated markets, e-NAM, the electronic national market, and reform of the APMC system.

D. Price and policy causes

13. Minimum support prices and the Commission for Agricultural Costs and Prices, which gave the farmer an assured price and therefore the confidence to invest in inputs.

14. Procurement and buffer stocks through the Food Corporation of India, which stabilised prices.

15. Input subsidies on fertiliser, power and irrigation, which made the Green Revolution package affordable.

16. Crop insurance under the Pradhan Mantri Fasal Bima Yojana, which reduced the risk that pushed farmers towards low-yield, low-risk crops.

17. Income support through PM-KISAN.

E. Diversification and other causes

18. Diversification into horticulture, floriculture, dairy, poultry and fisheries, which raise income per hectare far more than cereals. India is now the world's largest producer of milk.

The extent of the growth

India's population has risen from about 36 crore in 1951 to more than 140 crore, making it the world's most populous country. Growth was not steady. The Census of 1921 is called the "great divide": before it, births and deaths were both high and the population barely grew; after it, deaths fell sharply while births stayed high, and the population began to rise fast.

The factors divide into those that keep the birth rate high, those that brought the death rate down, and a third group that operates independently of both.

A. Factors keeping the birth rate high

1. Poverty. The strongest single factor. A poor household treats children as earning hands and as old-age security, since there is no pension, so the poorer the family the greater the incentive to have more children. Fertility is accordingly highest among the poorest.

8. Predominance of agriculture, where children can contribute labour from an early age.

9. Lack of awareness of and access to contraception, particularly in rural areas.

10. Hot climate and early puberty, a factor named in the standard texts.

B. Factors that brought the death rate down

11. Control of epidemics. Plague, cholera, malaria and smallpox once killed in very large numbers. Smallpox was eradicated in India in 1977.

12. Better medical facilities: immunisation, antibiotics, primary health centres and the spread of hospitals.

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

14. Control of famine. The Green Revolution and the public distribution system ended famine deaths and secured the food supply.

15. Better sanitation and safe drinking water, and improved nutrition.

Measures taken

India was the first country in the world to adopt an official family planning programme, in 1952. The National Population Policy, 2000 set the goal of a stable population by 2045. Entry 20A of the Concurrent List, inserted by the 42nd Amendment, 1976, gives both Parliament and the States competence over population control. Beyond that, the measures are the mirror image of the causes: raising the age at marriage, female education under the RTE Act, 2009, employment for women, free and accessible contraception, maternal and child health services, social security that removes the need for children as insurance, and incentives for small families.

⚠️ The limit of compulsion

There is no central law compelling any citizen to limit family size, and that is deliberate. Coercive sterilisation during the Emergency (1975 to 1977) produced a lasting public backlash and set the programme back by years. India's approach since has rested on education, incentive and voluntary choice.

Introduction

The National Agricultural Policy was announced in July 2000. It was the first comprehensive national policy for agriculture since independence, and it came at a particular moment: nearly a decade after the reforms of 1991, which had been industrial and financial in focus and had largely passed agriculture by, and five years after India joined the WTO in 1995, which exposed Indian farmers to world trade rules for the first time.

The core objective

The policy set a target of a growth rate in excess of 4% per annum in the agricultural sector, and specified the kind of growth it wanted:

1. Growth based on the efficient use of resources, and on the conservation of soil, water and biodiversity.
2. Growth with equity, spread across regions and across farmers.

A national agricultural bio-technology policy; protection of plant varieties and farmers' rights, which India enacted in the Protection of Plant Varieties and Farmers' Rights Act, 2001, using the flexibility TRIPS allows; strengthening of research and extension; and the use of information technology to reach the farmer.

D. Inputs management

Adequate and timely supply of quality seed, fertiliser and credit; balanced and conjunctive use of water; rational use of fertiliser; and rural electrification and energy for agriculture.

E. Incentives for agriculture

Removal of distortions between agriculture and industry in trade policy; removal of restrictions on the movement of agricultural commodities across the country; progressive dismantling of controls under the Essential Commodities Act, 1955; and the creation of a single national market.

F. Investments in agriculture

A commitment to raise public investment, which had been declining, and to attract private investment in agriculture and agro-processing, with rationalisation of subsidies so that they do not crowd out investment.

1. It named the right objectives. Sustainability, equity, diversification and demand-driven growth were the correct diagnosis, and they anticipated by many years the problems that later became urgent, groundwater depletion, soil degradation and the neglect of pulses and oilseeds.
2. It addressed rainfed agriculture and watershed development, correcting the Green Revolution's concentration on irrigated regions.
3. It set the direction for later policy. The Protection of Plant Varieties and Farmers' Rights Act, 2001 was enacted directly under it, and the National Policy for Farmers, 2007, which followed the National Commission on Farmers chaired by Dr M. S. Swaminathan, developed its themes.
4. It recognised marketing as the binding constraint, and the APMC reform and e-marketing agenda that continues today began here.
5. It took the WTO seriously, providing for the protection of farmers against unfair competition while working within the rules.

Analysis: where it fell short

6. Farmer distress continued. Indebtedness and farmer suicides persisted through the years following the policy, which is the strongest single evidence that it did not reach the small and marginal farmer.
7. The environmental commitments were not backed by instruments. Groundwater continued to deplete, because nothing in the policy changed the incentive created by free power.

Conclusion

The National Agricultural Policy 2000 was a sound diagnosis with weak instruments. It identified, earlier than most, that Indian agriculture needed sustainability, diversification, marketing reform and investment rather than more of the Green Revolution package, and much of what it proposed remains the agenda today. It failed to deliver because it was a policy statement rather than a law, because agriculture is a State subject, and because it never resolved the conflict between subsidy and investment that continues to define Indian agricultural policy.

A. The organised sector

1. The Reserve Bank of India stands at the apex. It regulates the market, is the lender of last resort, and conducts monetary policy through the repo and reverse repo rates, the Liquidity Adjustment Facility, the cash reserve ratio, the statutory liquidity ratio and open market operations.

2. Commercial banks, public sector, private sector, foreign, regional rural and small finance banks, which are both the largest lenders and the largest borrowers in the market.

3. Cooperative banks, at the State, district and urban levels.

4. Development financial institutions and all-India institutions: NABARD, SIDBI, EXIM Bank and the National Housing Bank.

5. Non-banking financial companies, mutual funds, insurance companies and primary dealers.

6. The Discount and Finance House of India (DFHI), set up in 1988 on the recommendation of the Vaghul Working Group, to develop a secondary market in money market instruments.

6. Repo and reverse repo market. Sale of a security with an agreement to repurchase it, which is in substance a collateralised short-term loan, and the principal instrument of RBI liquidity management.

7. Collateralised borrowing and lending, TREPS. The CBLO segment, introduced in 2003, was replaced by Triparty Repo (TREPS) in 2018, and is now the largest segment of the overnight market.

8. Money market mutual funds, which let smaller investors participate.

B. The unorganised sector

1. Indigenous bankers, who accept deposits and lend, and who deal in the hundi, an indigenous bill of exchange. They operate outside the RBI's control.

2. Moneylenders, who lend to farmers, artisans and small traders at very high rates, and who remain a substantial source of rural credit despite decades of institutional expansion.

3. Chit funds and nidhis, savings and lending associations, partly regulated by the Chit Funds Act, 1982 and by State legislation.

4. Unregulated non-banking financial companies.

Reforms since 1991

Following the Sukhamoy Chakravarty Committee (1985), the Vaghul Working Group (1987) and the Narasimham Committee (1991 and 1998):

Deregulation of interest rates; introduction of new instruments, CDs in 1989 and CP in 1990; treasury bills of varied maturity; the setting up of DFHI in 1988; the Liquidity Adjustment Facility from 2000; CBLO in 2003 and TREPS from 2018; electronic trading through the Negotiated Dealing System; the phasing out of ad hoc treasury bills in 1997, ending automatic monetisation of the deficit; and a flexible inflation targeting framework with a Monetary Policy Committee from 2016.

Conclusion

The Indian money market has been transformed since 1991 from a narrow, rate-controlled market into a deep, instrument-rich and electronically traded one at its organised end. Its dual structure remains, and the unorganised sector, though shrinking, still serves those the formal system has not reached. Closing that gap is what financial inclusion is for.