Introduction to Business EconomicsMTP Jun 22Question 593 of 209
All Questions

If there is no central planning authority to make the fundamental economic decisions and thus to allocate productive resources, how can then free enterprise or capitalist economy solve its central problems?

Options

AThrough the power of God
BOn the basis of decision taken by industrial groups
CThe free market economy uses the impersonal forces of the market to solve its central problems
DNone of these
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Correct Answer

✅ Option c — The free market economy uses the impersonal forces of the market to solve its central problems

All Options:

  • AThrough the power of God
  • BOn the basis of decision taken by industrial groups
  • CThe free market economy uses the impersonal forces of the market to solve its central problems
  • DNone of these

Detailed Solution & Explanation

• In a free enterprise or capitalist economy, there is no central authority dictating economic decisions. Instead, the economy relies on the principles of a free market. • The core mechanism for solving central economic problems (what to produce, how to produce, and for whom to produce) in such an economy is the price mechanism. This is often referred to as the "invisible hand" of the market, a concept introduced by Adam Smith. • Prices act as signals. When demand for a good is high, its price tends to rise, signaling to producers that they should allocate more resources to producing that good. Conversely, falling prices signal reduced demand and encourage producers to shift resources elsewhere. • This constant interplay of supply and demand, reflected in changing prices, guides resource allocation and production decisions without the need for a central planner. Consumers' preferences, expressed through their willingness to pay, and producers' pursuit of profit drive these decisions. • Therefore, option (C) is correct because the impersonal forces of the market, primarily the price mechanism, coordinate economic activity and solve the central problems. • Option (A) is incorrect as economic systems are based on human decisions and mechanisms, not divine intervention. • Option (B) is incorrect because while industrial groups make decisions, these decisions are themselves influenced and coordinated by the broader market forces, not made in isolation as the primary problem-solving mechanism for the entire economy. Their decisions are a *part* of the market process, not the *solution* to the central problems in the absence of a central authority.

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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