According to Adam Smith, which two principles are essential to the survival of an economy?

• A. Government intervention and central planning
• B. Self-interest and competition
• C. Trade restrictions and protectionism
• D. Monopoly power and price controls

Answer: (B)

Verified step by step guidance

1. Understand the context of Adam Smith's economic philosophy, which emphasizes the natural mechanisms that drive economic activity without heavy government intervention.
2. Identify the key principles Adam Smith highlighted in his work, particularly in 'The Wealth of Nations', focusing on what he believed sustains economic growth and efficiency.
3. Recognize that Adam Smith argued that individuals acting in their own self-interest unintentionally contribute to the overall economic good, a concept often referred to as the 'invisible hand'.
4. Acknowledge that competition among individuals and firms is crucial because it regulates prices and quality, ensuring resources are allocated efficiently.
5. Conclude that the two essential principles according to Adam Smith are 'self-interest' and 'competition', as these drive economic survival and prosperity.