Introduction to Business EconomicsMTP Nov 23Question 595 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 interaction of buyers and sellers in markets. • The "impersonal forces of the market" refer to the mechanisms of demand and supply, and the price system. When consumers demand more of a good, its price tends to rise, signaling to producers that there's a profit opportunity. This encourages producers to allocate more resources to that good. Conversely, if demand falls, prices drop, and resources are shifted elsewhere. • This price mechanism effectively answers the central problems of 'what to produce' (what consumers are willing to pay for), 'how to produce' (producers choose the most cost-effective methods to maximize profit), and 'for whom to produce' (those who can afford the goods at market prices). This concept is often referred to as the "invisible hand" by Adam Smith. • Option (C) is correct because it accurately describes how a capitalist economy, without central planning, coordinates economic activity and allocates resources through the interplay of supply, demand, and prices. • Option (A) is incorrect as economic systems are based on human decisions and interactions, not divine intervention. • Option (B) is incorrect because while industrial groups make decisions, these decisions are ultimately guided and constrained by the broader market forces of demand, supply, and competition, not solely by their own internal planning. Their decisions are a *part* of the market forces, not a replacement for them.

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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