Introduction to Business EconomicsMTP Nov 22Question 594 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 fundamental economic problems (what to produce, how to produce, and for whom to produce) are solved through the interaction of buyers and sellers in markets. • This interaction creates what is known as the "price mechanism" or "invisible hand," as described by Adam Smith. Prices act as signals, guiding producers on what to supply based on consumer demand and profitability, and guiding consumers on what to buy based on their preferences and budget. • Therefore, the impersonal forces of the market, driven by supply and demand, competition, and the pursuit of self-interest, effectively allocate resources and solve the central economic problems without the need for a central planner. This aligns with the core principles of a market economy. • Option (A) "Through the power of God" is incorrect because economic systems are human constructs and operate based on observable principles, not divine intervention. • Option (B) "On the basis of decision taken by industrial groups" is incorrect because while industrial groups (firms) make decisions, these decisions are themselves influenced and constrained by the broader market forces, not made in isolation as a central planning mechanism. The collective decisions of many such groups, interacting in the market, form the solution.

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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