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Chapter 2 National Decision Making Societies, as well as individuals, must make choices with limited resources. Thus societies are also faced with scarcity. To decide how to use these resources wisely, a society must answer three questions.

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Chapter 2

National Decision Making

Societies, as well as individuals, must make choices with limited resources. Thus societies are

also faced with scarcity. To decide how to use

these resources wisely, a society must answer three questions.

1) What Are We Going To Produce?

Society must decide on what items will be made. Ex. Tanks or bread

man and tanks tiananmen square.htm


2) How is it to be produced?

Because our resources are limited we want to use them as wisely as possible.

So finding the most efficient way to produce the maximum amount of goods and services is (usually) the goal.

Therefore, how will the goods be produced,

by government or

by private individuals/ companies?


3) Who will receive the goods?

Societies must answer:

Does everyone receive the same amount?

Do people get as much as they want if they have the resources?

How do we decide if people need items,

and if needed must they have

resources to acquire their needs?


Three Model Economies

Traditional Economy - customs and traditions of the society provide the base of their economy. Traditional economies discourages growth or change.

There is little incentive to try and do things better or differently if it has been working in the past.

- Traditional economies provide economic, political and social stability with no major upheavals or changes.

Examples - rural communities in Africa/ Asia , the Amish of Pennsylvania, Inuit of the NWT.


Command Economy - the government answers the three questions relating to resources.

(Ex. Communism )

- the government alone decides what to produce,

how to produce it and how much to make,

and who will receive the goods and services. Government owns all capital ( land, machinery, buildings etc. )

There are advantages and disadvantages to

this system .



1) In this system ,a fair distribution of income can be achieved.

2) Unemployment can be eliminated.

3) The production of goods can be guaranteed.

4) In communist societies, 100 % employment was always a goal. Everyone worked and made a living.



1)The chance of making serious mistakes were high.

( Ex. In production , the number of items produced, under or over estimating demand )

2 ) People who made the decisions could make unpopular decisions.

( Resources go to guns, not winter coats or toilet paper)

3) A totally planned economy does not allow for individual choicein purchasing goods and

services. ( Lots of tomato soup purchased did not mean more would be made)

4) There was no competition and so few incentives to work hard. ( Getting fired or laid off did not happen)


Market Economy - The actions of the buyers

and sellers directs the economy ( consumers and producers )

- People know what they want so they look to purchase those items.

What is produced is based on what people want.

- The money spent on products determineswhat isproduced with the resources available.

The CONSUMER directs what is produced

and what services are provided through the

choicesthey make.



-Competition between producers

( suppliers/ stores ) for the consumers money determines how the product is made.

The most efficient method:

( ex. in factories with machines or in homes by hand)

-The market ( you and I ) wants the cheapest goods

and buys accordingly.

Whomever can produce the goods and services most cheaply tends to get our money.

So :Efficiency + Low Cost = Profit


For whom does the market economy produce?

- The businesses who produce the best quality goods

at the lowest prices tend to get the consumers dollar. -The more items made well and cheaply means

that more items are purchased and the owner / producer makes more money.

For a wholesaler ( a business supplier, say McCain's foods or Scott Paper towels), this means more items supplied to retail stores.

For a retailer ( store) it means having the lowest

price because of buying in bulk and then providing customers with items at lower prices compared to their competition. ( ie. Wal-Mart vs. Zellers)


Advantages to the Market Economy

1. Things produced are the type and quality the consumer wants.

2. Individuals are free to choose or change their jobs

if they want.

3. Business people are free to own resources,

hire ( and fire ) workers, and decide what

products/ services to provide and how to provide


4. The market economy is flexible. It changes as demand changes.


Disadvantages to Market Economy

1. Goods and services go to people with the most money. ( The rich get richer / you need to have money to make money )

2. Business people may control the market for a good or service.

-This can force the consumer to pay high prices or workers to accept low wages.

This can be monopoly which means complete control over the supply of a good or service.


3. There may be an over-production of goods

( called a glut ).

There may be underproduction of goods ( called a shortage ). This can lead to job layoffs if there is a glut or lead to profit -gouging with a shortage.

Profit - gouging means the supplier raises prices

to an extremely high level to take advantage of a shortage of specific goods. ( Gas prices after

Hurricane Katrina or price of batteries after the

1999 ice storm in Ont/ Que.)

4. Consumers may not recognize goods that are harmful, useless or worthless.


Comparison of Economies Chapter 2

Decide which type of economy and what question is involved with the following statements.

1) We will divide the food the same way as we always have. Traditional/Who

2) The demands of the consumer will dictate the items made by the producers. Market/What

3) The fish will be caught the same way that they have always been caught. Traditional/how

4) The goals of the central authority will determine the methods of production. Command/How.

5) Competition , leading to lower prices , determines the producers methods of production. Market/How

6) The government determines production ,

not the consumers wishes. Command/What

7)The demands of the consumer makes no difference in the goals of the economy. Command/What

8) The items produced are allocated according to the resources of the consumer. Market/Who

9) Goods are provided according to set government policy. Command/who

10) The producer produces according to the set quotas. Command/What



On page 16 of your text, list and describe each of the 5 characteristics of a pure Market Economy.


Five Basic Characteristics of a Pure Market Economy

1. Private Property: People and corporations have the right to own consumer goods and goods used in production and the right to own and dispose of property as they see fit.

2. Profit: People and corporations have the right to earn profit.

3. Consumer Sovereignty: The consumer in a market economy determines what, how and for whom to produce. We influence what goods businesses produce.

4. Self Interest: People want what is best. Self interest provides a motivation for business people to make profit and workers to look for jobs with better pay.

5. Competition: It is the result of people seeking higher wages and profits as well as lower prices. It acts to regulate self interest.


Goals of the Canadian Economy

1. Full Employment: The Canadian economy fluctuates between periods of low and high unemployment. The goal is to have a healthy economy and as many people employed as possible.


2. Stable Prices: Another goal is to keep the increases in the general level of prices low. High inflation rates can cause the general level of prices to increase, which means you purchase less for your money.


3. Balance of Trade: In order to buy products from another country, we have to sell goods to them, and in order for them to buy goods from us, they have to sell to us.


4. Economic Growth: This means an increase over a period of time in a country’s output of goods and services. Our economy is growing and this is why we enjoy a high standard of living.


5. Economic Justice: This means the fair distribution of income through government intervention. Disadvantaged groups are looked after by the government by welfare payments and employment insurance. Disadvantaged provinces receive transfer payments.


6. Economic Freedom: Workers are free to choose their jobs, business people are free to choose their type of business, and consumers are free to choose their products


7. Economic Efficiency:

Businesses rely on competition to promote the use of economic resources to produce goods and services at a minimum cost.


8. A Reasonable Level of Federal and Provincial Debt:

The level of debt does not require government to cut back on essential spending in order to pay interest on the debt.


Conflicts Among Economic Goals:

-Lowering unemployment may result in higher prices

-Achieving a better balance of trade with other countries may involve restrictions on individual economic freedom

-Attempts to improve economic efficiency may result in economic injustice


Objectives of the Economy, Presentation:

During this class you will have 45 min to prepare a presentation to deliver to the class.

-In groups of 4 you will Research what are some major problems facing Canada today

-From the problems that you uncover choose which 1 concerns your group the most.

-In your presentation you will include:

-A title page with the groups names /.5

-the problem you chose and a statement why it concerns your group the most /2

-If there is any economic objectives you think should be add to the list of 8 /1

-List the 8 economic objectives discussed in class and rank them in order of importance to /16 your current situation. be able to explain why you ranked them so

- a simple sources page (just the web sites or article titles) /.5



The Economy of the Former Soviet Union

-jot down important points through lecture


Economy of the former Soviet Union.

The Soviet Union was a command economy in which the government was primarily responsible for answering the three major economic questions.

The government owned all the land, factories, machines and natural resources although there was some private ownership. ( Ie: some houses, clothing, household items and small plots of land for

vegetables etc. )


What and How were things created?

Five year plans were used to determine the

general direction of the economy. These 5 year plans were then broken down into specific one year goals that the people were expected to meet within that year.

The gov’t planning agency that set the goals was called GOSPLAN. It set individual targets for every farm, every factory and every method of production

in the country.


Incentives were eventually used to encourage

groups / factories/ farms to reach their target goals.

These incentives were usually in the form of extra money paid to workers by the government.

The problem was that even if targets were reached

and incentives paid, there was very little to spend the money on , due to a severe lack of consumer goods.


Profit did exist in the Soviet Union but profit

was not a motivator like it is in the market system. The government kept all the profit and owned

all the resources.

There was little incentive to work hard as an individual and try to get ahead because only the

gov’t profited directly, not the worker.


Why the Soviet Union Collapsed.

The Soviet Union focussed on economic growth, not on the production of consumer goods.

This was necessary in the beginning ( 1920) because the Soviet Union had little industry or industrialization.

Therefore it needed to create factories and the

means of production before it could even think about producing consumer goods.

This meant that the economy grew and worked for a while but eventually reached a point where it could

no longer grow as it traditionally had.



Economic growth meant that factories had to be created.

Then those factories began to make the items needed to produce even more factories.

Machines were made to go into the new factories. The focus was on creating items to supply and build new infrastructure. Eventually, of course, there were enough factories and the need for new ones did not exist.

However, rather than switch over to producing items that individual consumers wanted, the system collapsed due to the inability and unwillingness of both the workers and government to change and adjust.


4 Reasons for the Collapse

1.Failure to Co-ordinate - In the Soviet Union,

there could be lots of some things and not enough

of others.

In a market system, this would mean someone

would make more of the scarce item and less of the overproduced item.

In the Soviet Union, though , those decisions

were made by government and were not easily adjusted.

So people began to hoard ( stock up) items when they were available, further throwing off the supply and demand chain and creating constant shortages.


2. Inadequate Quality Control -

It did not matter how well or how poorly an

item was made, as long as it was made.

Targets or goals were met but the items were usually of poor quality.

As well, goals were often set as monthly targets

so there was little pressure to make items quickly

or to create a steady supply for stores.

As long as you met the end of the month target

for your factory, you got your bonus.


3. Lack of Incentives -

There was no reason to change the way you were doing things. There was no fear of being fired.

If you worked hard, it mattered very little. You would not get paid more or get a promotion.

Even the monetary incentives ( bonuses) were of limited use as people frequently had nothing to

spend it on anyway.

There simply was no motivation to work hard or produce quality goods. Moral incentives were not enough to inspire workers.

People did not want to work hard simply to feel good about themselves and about their contribution

to society.


4. Pollution -

Reaching short term economic goals was more important ( to both the people and the government)than any long term environmental consequences,

even though the long term consequences was

taking a serious toll on the land.

Meeting targets and goals became more

important than anything else.

Thus the government, which usually is a tool to control industry and keep it from polluting the environment, actually was responsible for serious environmental disasters to the land and the people.


Communism happened in the Soviet Union ( Russia), China and Cuba because they were originally very poor, agricultural based economies where the majority of people did not own the land they worked on. It was border line feudalism. This was in direct opposition to Karl Marx's belief that communism would happen by working class factory workers overthrowing their employers. The peasants / farm laborers could see immediate benefits for themselves if they supported communism and took over the large land estates for themselves/ government.

China has been more successful than the former Soviet Union in terms of economic reform because China has managed to maintain political, and social control over its people while allowing economic reforms like private ownership. Examples are Chinese restrictions on Google or social websites while allowing private investment and personal profit for selected people.

Russia waited too long to allow economic reforms like private investment and business ownership and so their economy collapsed in the late 1980's- early 1990's.


Questions for pages 21-24

1. In the former Soviet Union, what was the pattern of organization?

2. Give three examples to show that there was some private ownership in the former Soviet Union.

3. What was the difference between the 5 year plans and the 1 year plans?

4. What was the name of the organization that developed those five year plans?

5. Why were there no incentives to earn profit in the former Soviet Union?

6. Who earned the highest incomes in the former Soviet Union?

7. What were four causes for the collapse of the former Soviet Union’s command economy?

8. What was perestroika?

9. Who was Karl Marx, and how did he think communism would happen?

10. Opposite to what Karl Marx thought, where did communist countries arise from?


Economics 621

Chapter 2

Questions and answers for pages 21-24

1. In the former Soviet Union, what was the pattern of organization?

-The state owned the land, factories, and machines used in production.

2. Give three examples to show that there was some private ownership in the former Soviet Union.

-Some retail businesses were privately owned.

-One third of the homes in cities were privately owned.

-Most of the homes on farms were privately owned.

-Personal goods such as clothing and household items were privately owned.

3. What was the difference between the 5 year plans and the 1 year plans?

-The five year plans gave a general direction for the development of the economy over five years but was made up of one year plans that detailed output targets for industries, farms, and firms.

4. What was the name of the organization that developed those five year plans?

-It’s name was the Gosplan, the state planning commission.

5. Why were there no incentives to earn profit in the former Soviet Union?

-Any profits that were made went to the state.

6. Who earned the highest incomes in the former Soviet Union?

-Those who earned the highest were artists, scientists, professors, and government officials.

7. What were four causes for the collapse of the former Soviet Union’s command economy?

-Some of the causes included the failure of coordination, lack inadequate quality control, lack of incentives, and wide spread pollution.

8. What was perestroika?

-It was a plan that restructured the Soviet economy towards a market economy.

9. Who was Karl Marx, and how did he think communism would happen?

-He was a German philosopher and economist who though that it would occur from the working class taking over the land or business of their employers for immediate benefits.

10. Opposite to what Karl Marx thought, where did communist countries arise from?

-they came from countries that were originally very poor and agriculturally based (china, soviet union, cuba- holding of land for labour/services)


Decision making Grid pg 5-6

1. Define Problem

2. List alternatives

3. List criteria

4. Evaluate and weight criteria

5. Evaluate alternatives

6. Make the best decision