Introduction to Business EconomicsMODULEQuestion 587 of 209
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In a free market economy, allocation of resources is determined by

Options

AVoting done by consumers
Ba central planning authority.
Cconsumer preferences.
Dthe level of profits of firms.
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Correct Answer

✅ Option c — consumer preferences.

All Options:

  • AVoting done by consumers
  • Ba central planning authority.
  • Cconsumer preferences.
  • Dthe level of profits of firms.

Detailed Solution & Explanation

• In a free market economy, also known as a capitalist economy, economic decisions regarding production and resource allocation are primarily driven by the forces of supply and demand, with minimal government intervention. • The correct answer is (C) consumer preferences. In a free market, consumers express their desires for goods and services through their purchasing decisions. This is often referred to as "consumer sovereignty." When consumers demand more of a particular product, its price tends to rise, signaling to producers that there is a profit opportunity. • This profit motive encourages firms to allocate their resources (labor, capital, land) towards producing those goods and services that consumers prefer. For example, if consumers prefer smartphones over landline phones, resources will shift from landline phone production to smartphone production. This mechanism ensures that resources are allocated to satisfy the most pressing consumer wants. • Option (A) Voting done by consumers is incorrect because consumers vote with their money, not through formal political voting, to influence resource allocation in a free market. • Option (B) a central planning authority is incorrect because this describes a centrally planned or command economy, where the government dictates resource allocation, which is the opposite of a free market.

About This Chapter: Introduction to Business Economics

Paper

Paper 4: Business Economics

Weightage

5%

Key Topics

Meaning, Scope, Price Mechanism

This chapter lays the groundwork for understanding Business Economics as a discipline. It covers the meaning, scope, and nature of economics — including key distinctions like Microeconomics vs Macroeconomics, Positive vs Normative economics, and the fundamental economic problem of scarcity. Students learn how businesses use economic principles for decision-making in a competitive marketplace.

View Official ICAI Syllabus

Exam Strategy Tip

Focus on definitions and distinctions between concepts. Questions often test whether you understand the difference between Micro and Macro, or Positive and Normative statements.

Related Comparison Tables

Microeconomics vs Macroeconomics: The Complete CA Foundation GuidePositive vs Normative Economics: Fact vs Opinion

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