BLS LLB 5 Years Sem 1 Economics 2019-20 Question Paper with Solutions

Monopolistic competition is a market in which there are many sellers selling differentiated but closely substitutable products. The theory was developed by Prof. Edward H. Chamberlin in 1933.

Two of its features:

1. Product differentiation. This is the defining feature. Products are similar but not identical, being distinguished by brand name, quality, packaging, design, location or after-sales service. Differentiation gives each seller a small monopoly over its own brand, which is where the name comes from.
2. A large number of sellers. Each firm is small relative to the market and acts independently, so no firm's decision provokes a reaction from the rest. This is the competition element.

Two further features: free entry and exit, so only normal profit is earned in the long run; and heavy selling costs and advertisement, which is peculiar to this market form because firms compete on distinctiveness rather than on price.

The public sector is that part of the economy which is owned, controlled and managed by the government, whether central, state or local, and which is run with social welfare as an objective alongside profit rather than for profit alone.

Its features:

1. Government ownership of capital and assets.
2. Social welfare as the guiding objective: employment, balanced regional development, and the supply of essential goods and services.
3. Accountability to Parliament or the State legislature, and subject to audit by the Comptroller and Auditor General.
4. Operation in areas of strategic importance or of very large capital requirement.

Its forms: the departmental undertaking (Indian Railways, the Post Office), the statutory corporation created by a special Act (LIC, the RBI, the Food Corporation of India), and the government company registered under the Companies Act with at least 51% government shareholding (ONGC, SAIL, BHEL).

A direct tax is a tax whose impact and incidence fall on the same person: the person who pays it to the government is the person who finally bears the burden, and it cannot be shifted to anyone else.

The impact is on the person who pays the tax; the incidence is on the person who bears it.

Examples: income tax, corporate tax and capital gains tax, all levied under the Income Tax Act, 1961. Wealth tax was a direct tax until it was abolished in 2015.

The headquarters of the World Trade Organization (WTO) is at Geneva, Switzerland. It occupies the Centre William Rappard on the shore of Lake Geneva.

Supporting particulars worth adding for the second mark:

• The WTO was established on 1 January 1995 by the Marrakesh Agreement, replacing the General Agreement on Tariffs and Trade (GATT), 1947, whose secretariat was at the same address.
• It has 166 members, and India is a founder member.
• It is headed by a Director-General, and its highest decision-making body is the Ministerial Conference, which meets at least once every two years.

Capital is that part of a person's wealth, other than land and labour, which is used to produce further wealth. It is the produced means of production: machinery, tools, factory buildings, raw materials and stocks.

Two of its characteristics:

1. Capital is man-made. Unlike land, which is a free gift of nature, capital is produced by human effort, which is why it is called a produced factor of production. It is the result of past saving and investment.
2. Capital is not a primary factor; it is passive. It cannot produce anything by itself and must be combined with labour to be productive. Land and labour are primary; capital is derived from them.

Two further characteristics: capital is perishable and depreciates, wearing out with use and needing replacement, which is why depreciation is provided for; and capital is mobile, both between places and between uses, more so than land or labour.

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

B. Regulatory functions

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

C. Developmental functions

1. Training of intermediaries and promotion of research.

Meaning of supply

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. It is not the whole stock: it is that part of the stock actually brought to market at a price.

Statement of the law

Other things remaining equal, the quantity supplied of a commodity varies directly with its price.

Price ↑ → Quantity supplied ↑
Price ↓ → Quantity supplied ↓

The relationship is direct, which is the opposite of the law of demand.

Supply schedule

2. The law of increasing cost. Producing more raises marginal cost, so a producer will supply more only at a higher price that covers it.
3. New firms enter the market when the price is attractive.
4. Existing firms use idle capacity and hold back less of their stock.

Exceptions

1. Perishable goods, which must be sold whatever the price.
2. A backward bending supply curve of labour, where a worker who earns enough at a high wage chooses leisure and supplies fewer hours.
3. Rare and antique goods, whose supply is fixed and cannot rise at any price.
4. A seller in distress, needing cash, who sells more as the price falls.
5. Agricultural produce in the short run, since output is fixed until the next harvest.
6. Expectation of a further price rise, which makes a seller withhold rather than supply.

3. It uses general equilibrium analysis. All markets are studied together and their interdependence is central, in contrast to the partial equilibrium method of microeconomics.

4. It does not assume full employment. Classical economics assumed the economy tends automatically to full employment. Keynes showed that an economy can settle at an underemployment equilibrium and stay there, which is the foundation of the whole subject.

5. It is policy-oriented. It supplies the reasoning behind fiscal policy, the government's taxing and spending, and monetary policy, the central bank's control of money and interest rates. The Union Budget and the RBI's repo rate decisions are macroeconomics in action.

6. It studies the general price level, and therefore inflation and deflation, rather than the price of any single good.

7. It studies growth and the trade cycle, the long-run rise in output and the recurring phases of boom and depression.

8. It deals with the economy's external relations, the balance of payments and the exchange rate.

What they are

Small scale industries are classified since the MSMED Act, 2006 as Micro, Small and Medium Enterprises (MSMEs), with a revised composite criterion of investment and turnover effective 1 July 2020 under which the old distinction between manufacturing and service enterprises was abolished.

Their importance

1. Employment generation. This is their single greatest contribution. MSMEs employ on the order of 11 crore people, second only to agriculture, and they do so at a low capital cost per job, which is exactly what a labour-abundant, capital-scarce country needs.

2. Contribution to output and exports. They contribute roughly 30% of India's GDP and about 45% of its exports.

3. Balanced regional development. They can be set up in small towns and villages with modest capital, which spreads industry away from the metropolitan centres, checks migration to cities and reduces regional inequality.

Government support

Priority sector lending and the CGTMSE collateral-free credit guarantee; the Udyam registration portal; public procurement policy reserving a share of government purchases; TReDS for discounting receivables; and the Samadhaan portal for delayed payments.

4. Low agricultural productivity, on holdings averaging about 1.08 hectares, dependent on the monsoon, with weak credit and defective marketing.

5. Low rate of capital formation. Low incomes give low savings, which give low investment, which keeps incomes low. This is Ragnar Nurkse's vicious circle of poverty.

6. Inflation, which erodes the real income of the poor fastest because food is the largest item in their budget.

7. Slow industrialisation and jobless growth, so labour leaving agriculture went into low-productivity informal work rather than into manufacturing.

8. Rural indebtedness, with borrowing from moneylenders at very high rates.

Meaning

Price elasticity of demand (Ep) is the degree of responsiveness of the quantity demanded of a commodity to a change in its price. The concept was developed by Alfred Marshall.

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.

The five types

1. Perfectly elastic demand (Ep = ∞). An infinitesimally small change in price causes an infinitely large change in quantity demanded. The demand curve is a horizontal straight line. It is a limiting case, approached by an individual seller under perfect competition.

Determinants

Availability of close substitutes, which is the most important; the nature of the commodity, necessity or luxury; its share in the budget; the number of its uses; whether the purchase can be postponed; habit; and the time period, since demand is more elastic in the long run.

What the dash in the first cell means

The paper prints a dash against the first unit of output instead of a figure. It is not a printing failure and nothing has to be assumed: the dash means nil, so the marginal cost of the first unit is zero and the variable cost begins to accumulate from the second unit.

Two things confirm it. The dash is printed cleanly here rather than left blank. And the companion paper of this course for 2022-23 sets the same sum the other way round, giving total cost instead of marginal cost, and there TC at one unit equals TFC exactly, which means TVC and MC at the first unit are both zero. The same convention, stated twice.

Write one line noting it and work the sum as printed.

Formulae used

2. TFC = ₹200 (unchanged at every output)
3. TC = TFC + TVC = 200 + 110 = ₹310
4. AFC = TFC ÷ Q = 200 ÷ 5 = ₹40.00
5. AVC = TVC ÷ Q = 110 ÷ 5 = ₹22.00
6. AC = TC ÷ Q = 310 ÷ 5 = ₹62.00, which equals AFC + AVC = 40.00 + 22.00 ✓

Checks that prove the table is right

1. AC = AFC + AVC at every row. Verify one or two in the answer book.
2. MC equals the difference between consecutive TC figures: 230 − 200 = 30, 250 − 230 = 20, 270 − 250 = 20, 310 − 270 = 40, 340 − 310 = 30, 420 − 340 = 80. ✓
3. The MC column adds to TVC: 0 + 30 + 20 + 20 + 40 + 30 + 80 = 220, which is TVC at 7 units. ✓
4. AFC falls continuously from ₹200 to ₹28.57 and never reaches zero.
5. AC is lowest at 6 units (₹56.67) and rises to ₹60.00 at 7 units, and it rises precisely because MC at the seventh unit is ₹80, which is above the average. That is the textbook relationship, and it is the strongest single check that the table is right.

Two changes deserve naming specifically. India began to import crude oil and export refined petroleum products, which is value addition in its plainest form. And India became the largest supplier of generic medicines in the world by volume.

3. Change in the composition of imports

Meaning

The capital market is the market for long-term funds, those needed for more than one year, in which savings are channelled from those who have them to those who will invest them in productive assets. It is contrasted with the money market, which deals in short-term funds.

Structure

A. The primary (new issue) market, where securities are issued for the first time, through a public issue, a rights issue or a private placement.

B. The secondary market (stock exchanges), where existing securities are bought and sold. The principal exchanges are the Bombay Stock Exchange (BSE), established 1875 and the oldest in Asia, and the National Stock Exchange (NSE), established 1992.

C. Its instruments: equity shares, preference shares, debentures, bonds, government securities and mutual fund units.

5. Low but rising participation by households. Indian households have traditionally held savings in gold, bank deposits and property rather than in securities, though systematic investment plans in mutual funds and demat accounts have grown very fast in recent years.

6. Volatility, and sensitivity to foreign flows. Because foreign portfolio investment is a large share of the free float, the market swings with global conditions, as in 2008 and in the taper tantrum of 2013.

7. A large and active government securities segment, in which the RBI manages the government's borrowing.

8. Continuing problems: insider trading and price manipulation, the reach of the market being confined largely to cities, low financial literacy, and periodic scams, of which the Harshad Mehta scam of 1992 and the Ketan Parekh scam of 2001 are the notorious examples, each of which produced the next round of regulation.

Reforms since 1991

Establishment of SEBI as a statutory regulator (1992); abolition of the office of the Controller of Capital Issues, so that pricing became free; establishment of the NSE (1992); screen-based trading and dematerialisation; the opening of the market to foreign institutional investors; the Depositories Act, 1996; and rolling settlement.

Introduction

The theory was given by David Ricardo in Principles of Political Economy and Taxation (1817). It is the first systematic explanation of rent and remains the foundation of the subject, even though almost every part of it has been criticised.

Ricardo's definition

"Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil."

Three things follow from the wording. Rent is paid for land alone, not for buildings, fences or improvements, which earn interest on capital. It is paid for powers that are original, given by nature, and indestructible, not used up. And it is a payment out of the produce, so it arises from the land's productivity.

Rent on the extensive margin

As population grows, poorer grades of land are brought under the plough. Suppose three grades, each cultivated with the same outlay of labour and capital:

When only A is cultivated it is the marginal land and pays no rent. When B is brought in, B becomes marginal and A earns 40 − 30 = 10 quintals. When C is brought in, C becomes marginal, A earns 40 − 20 = 20 and B earns 30 − 20 = 10.

Rent of any land = its produce − the produce of the marginal land.

2. The historical order is wrong. Settlers occupy the most accessible land first, not the most fertile. Ricardo ignored situation, which von Thünen made central.
3. No-rent land does not exist. In a country like India, where land is scarce, every piece of land fetches some rent.
4. Rent is not peculiar to land. Marshall showed that any factor in temporarily fixed supply earns a similar surplus, which he called quasi-rent.
5. It ignores scarcity rent. Land of uniform fertility would still earn rent because its total supply is fixed and demand grows.
6. Rent does enter price from the individual firm's point of view. For one farmer, rent paid is a cost like any other. Ricardo's proposition holds for society as a whole, not for the individual producer, and stating that distinction earns full marks.
7. The assumption of a single use is false. Land has alternative uses, agriculture, housing, industry, and the rent it earns reflects the best of them.
8. Perfect competition does not exist.

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 subject and it runs through every feature below.

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 primary reason India is classified as developing.

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.

B. Features of a mixed economy

9. Coexistence of the public and private sectors, with a joint sector as a third form. Since the New Industrial Policy 1991 the industries reserved for the public sector fell from 17 to a handful.

10. Economic planning alongside the market. Five Year Plans directed the economy from 1951 to 2017; NITI Aayog replaced the Planning Commission in 2015 and advises rather than allocates.

11. Regulation in the public interest, through SEBI, TRAI, the RBI and the electricity commissions, and competition law under the Competition Act, 2002.

12. Constitutional direction. The Directive Principles, especially Articles 38, 39 and 43, direct the State towards distributive justice.

C. Social features

13. High but uneven literacy, a low though rising female labour force participation rate, and the persistence of caste and the joint family as economic institutions affecting occupation, credit and inheritance.

Conclusion

The Indian economy is best described as a large, fast-growing, services-led mixed economy carrying an unfinished structural transition. Its central task is unchanged since independence: to move workers out of low-productivity agriculture into higher-productivity industry and services fast enough to raise incomes before the demographic window closes.

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.

3. Illiteracy, especially female illiteracy. Female education is the single strongest predictor of lower fertility, operating through later marriage, better knowledge and use of contraception, greater say in household decisions and a higher opportunity cost of a woman's time.

4. Preference for a son. Couples continue having children until a son is born. This is also what the PCPNDT Act, 1994 attacks by prohibiting sex determination.

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

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

7. Low status of women and limited participation in the workforce.

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

Consequences

Pressure on land, so holdings fragment to an average of about 1.08 hectares; disguised unemployment; pressure on food, housing, water, schools and hospitals; urban congestion and slums; environmental strain; and a lower rate of capital formation, since a larger share of income goes on consumption.

Government response

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. But there is no law compelling any citizen to limit family size, and coercive sterilisation during the Emergency (1975 to 1977) produced a backlash that set the programme back by years. The approach since has rested on education, incentive and voluntary choice.

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. 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.

• The Competition Act, 2002 turns on "relevant market", "dominant position" and "appreciable adverse effect on competition". Defining a relevant market requires cross elasticity of demand.

5. Incentives and deterrence in criminal law. 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 severity.

6. 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.

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

8. Regulation as a response to 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.

9. Labour and welfare law. Minimum wages, bonus and social security legislation rest on theories of wage determination. The Code on Wages, 2019 provides a statutory floor wage, which is an intervention in a market.

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 cultivating more land, which is not a rise in productivity.

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

1. Land productivity, output per hectare, usually expressed in quintals or tonnes per hectare. This is what "yield" means.
2. Labour productivity, output per worker engaged in agriculture.

Productivity per unit of capital, water and fertiliser are also used, and water productivity has become the critical one.

1. Consolidation of holdings, so that scattered plots become workable units, as was done with success in Punjab and Haryana.
2. Secure tenancy and clear land records, so that a cultivator will invest in land they may not own, and can offer it as security for credit. Digitisation of records is the practical step.
3. Farmer Producer Organisations, which give small farmers the scale to buy inputs and sell produce on better terms without changing who owns the land. This is the most promising answer to fragmentation.
4. Marketing reform, through e-NAM, the electronic national market, and reform of the APMC system, so that a larger share of the consumer's rupee reaches the farmer.
5. Institutional credit through Kisan Credit Cards, cooperative banks and priority sector lending, to displace the moneylender.

B. Technical remedies

1. Irrigation, the single most effective measure, through the Pradhan Mantri Krishi Sinchayee Yojana, with micro-irrigation, drip and sprinkler, which raises yield and saves water together.
2. High-yielding and climate-resilient seed, and quality control over what is sold.

5. Food processing, which adds value and creates rural employment.
6. PM-KISAN income support, which steadies the household while other reforms take effect.

D. The structural remedy

1. Non-farm employment. Creating jobs in industry and services so that fewer people depend on the same land. This is the only remedy that can raise output per worker, and without it every other measure raises yield while leaving incomes where they are.

Conclusion

Raising agricultural productivity in India requires all three kinds of remedy together. Technical measures raise yield per hectare, institutional measures ensure the farmer keeps the gain, and only the structural measure raises output per worker, which is what determines whether farming is a living.

Main provisions

1. Abolition of industrial licensing for all industries except a short list, now reduced to a handful concerned with security, strategic and environmental interests. This was the central measure.

2. Reduction of the public sector's reserved area, from 17 industries to 8, and progressively to the present handful, chiefly atomic energy and railway operations.

3. Disinvestment. Government equity in public sector undertakings was opened to sale, both to raise revenue and to introduce market discipline.

4. Referral of sick public undertakings to the BIFR, so that chronic loss-makers could be restructured or wound up rather than subsidised indefinitely.

5. Liberalisation of foreign investment. Automatic approval for foreign equity up to 51% in specified industries at the outset, raised progressively since, with FDI now permitted up to 100% in most sectors. FERA was replaced by the far more liberal FEMA, 1999.

6. Free import of technology and automatic approval of foreign technology agreements in high priority industries.

Analysis: criticism

Employment grew far more slowly than output, so the period is described as jobless growth. Manufacturing's share of GDP has stubbornly refused to rise, which is why India skipped the industrial stage of development. Small units suffered from de-reservation and from import competition. Regional imbalance widened, as investment concentrated in a few States. Inequality rose. Agriculture received little attention in the reform package. And the withdrawal of the State was uneven: labour law and land acquisition reform were left undone for two decades, so the factor markets were never liberalised to the extent the product market was.

Conclusion

The New Industrial Policy 1991 is the turning point of independent India's economic history. It replaced the presumption that industry must be permitted with the presumption that industry may proceed, and it delivered growth, competition and consumer choice on a scale the previous system never approached. Its failure was not in what it did but in what it left undone: it liberalised the product market and left the factor markets, land, labour and capital, largely as they were, which is why manufacturing and employment lagged behind output for thirty years.