Module 1: Limits, Alternatives and Choices

By the end of this module, you will be able to:

 Discuss the role of economic theory in explaining human behavior.

 Differentiate between microeconomics and macroeconomics in the eyes of an
economist.
 Distinguish between positive and normative statements in the field of economics.
 Summarize how the scarcity of resources creates economic problems.
 Illustrate trade-offs, opportunity costs and attainable combinations using budget
schedules and budget lines.
 Use the possibility curve to show how growth and trade increases consumption.

Overview
In this module, we introduce the concept of "economics" and the terminology used to
describe it. One of the most important concepts you need to understand throughout
this course is the concept of scarcity. Most of our resources are finite (not unlimited) and
it is up to us to combine these resources (land, labor, capital and entrepreneurship) as
efficiently as possible.

I’ll bet you’ve often said, “I wish there were more hours to the day” or “I wish I had more
money”. Most of us realize that there are limitations to all the resources we have,
especially time and money. We deal with the trade-offs talked about in the textbook
every day. Many of us have budgets as we want to make the most efficient use of our
money. By efficient, I mean using our money in the best way to make us happy. As
consumers, we have budgets and budget lines, while producers have production
possibility curves. Both illustrate the trade-offs between what we choose to do (or
produce) and what we choose not to do (or produce).

Learning outcomes
By the end of this module, you will be able to:

 Discuss the role of economic theory in explaining human behavior.

 Differentiate between microeconomics and macroeconomics in the eyes of an
economist.
 Distinguish between positive and normative statements in the field of economics.
 Summarize how the scarcity of resources creates economic problems.
  Illustrate trade-offs, opportunity costs and attainable combinations using budget
schedules and budget lines.
 Use the possibility curve to show how growth and trade increases consumption.

Required readings
 Microeconomics (15th Canadian edition); Chapter 1

Commentary—About Microeconomics
Economics can be defined as a social science that provides a framework for individuals
and businesses regarding the allocation of scarce productive resources to produce
goods and services that are to meet the unlimited wants of consumers.

Macroeconomics is the study of the "big" economy, or the economic environment in

which we live and work: so it deals with issues like government economic policies,
unemployment, inflation, etc. This course is about microeconomics, which is the study of
the "small" economy, or how prices are arrived at between individuals or businesses.

Economics is all about how we make choices, the scarcity of resources and opportunity
costs. Every time we buy something, we make choices. If we buy a new pair of jeans, we
may not be able to afford to go out Friday night to show them off. You chose to pay
tuition for this course, and spend a couple of evenings a week studying. You had to
make a decision between two sets of scarce resources. First, the money paid for tuition
could have been spent on something else. Secondly the time you are spending studying
this course could have been spent playing hockey or indulging in another hobby.

For the next couple of weeks make yourself think of the choices and the opportunity
costs every time you make a decision to buy something or spend time doing something.
With 36 million people in Canada how does the economy coordinate all the decisions
that we all make? By the end of the course you will know. Like most textbooks, chapter 1
provides an overview of the subject and introduces you to the main concepts and
terminology.

Firms have to make choices too. They must decide what to produce and how much of it
to produce. If the firm chooses to make just jeans it can't also make shirts. A firm that
does make both has to decide how many of each to make. There is a trade-off between
shirts and jeans. How do they make that decision? By the end of the course you will
know. Firms try to maximize profits. So they will divide their resources in such a way that
increase profits.
Last, but of course, not least, whole industries have to make these same choices. Why do
we have dozens of corner stores and clothing stores, but there are only 2 or 3 places we
can go to for a cell phone. We discuss the 4 types of industry structures. Many of you
have jobs. Think about the type of structure your industry operates in. Are there just a
few big companies, or dozens of smaller companies? Does your industry spend a lot of
money on marketing? Or is it not worth the effort? Think about why that is. Does it
make sense to only have 4 or 5 places to go to buy clothes in Toronto?

Do you know what will be the biggest surprise for you in this course? You make all these
decisions! Because consumers vote with their money, companies and industries produce
what we want in the quantities that we are will to buy. If we don’t buy their products or
services, the companies will stop producing them, either because the owners of the
companies are smart and realize the market isn’t there or the company goes bankrupt
because nobody is buying their product.

Scarcity and Exchange

Economics assumes that everyone makes choices based on their own self-interest. They
weigh the benefits and costs of their decisions before choosing a course of action.
Economics focuses especially on the benefits and costs of buying and selling, and
exchanging goods and services.

Questions
Answer these questions in your journal:

1. Explain some of the examples you saw in the video. How did Luke and Obi Wan make
use of this economic concept?
2. Relate how the concepts in this video relate to experiences you have had.
3. Do you agree that a market system works better than a command system? Why or why
not?
Module 2: The Market System
By the end of this module, you will be able to:

 Explain the difference in economy between a command and a market system.

 Discuss how a market system runs based on its main characteristics.
 Summarize how a market system addresses the five fundamental questions of
any economy.
 Indicate how the economy adjusts to change and promotes progress in a market
system.
 Explain why the market system is more efficient and effective that the command
system.
 Explain how the circular flow model demonstrates the linkages between
consumers, producers and markets the markets in an economy.

Overview
In this module, you are introduced to market systems and the Circular Flow diagram. A
market system decides what will be produced, how it will be produced, who gets the
output and how change happens. The most common form of systems are communism
and capitalism.

We’ve all heard about communism, which is also known as a command economy. It is a
command economy because the government makes all these decisions and commands
the citizens to obey. Citizens have very little choice. At the opposite extreme, you find
capitalism. In a purely capitalist economy, all decisions are made by the citizens with no
government intervention. Most countries operate somewhere in between.

Where do you think Canada is on this continuum? The closer you are to a command
economy, the more socialist your country is in nature. However, no country allows its
citizens to make all the decisions; even the United States which is the poster child for
capitalism. Can you tell the difference?

Learning outcomes
By the end of this module, you will be able to:

 Explain the difference in economy between a command and a market system.

 Discuss how a market system runs based on its main characteristics.
  Summarize how a market system addresses the five fundamental questions of
any economy.
 Indicate how the economy adjusts to change and promotes progress in a market
system.
 Explain why the market system is more efficient and effective that the command
system.
 Explain how the circular flow model demonstrates the linkages between
consumers, producers and markets the markets in an economy.

Required readings
 Microeconomics (15th Canadian edition); Chapter 2

ommentary—About Circular Flow

The Circular Flow Diagram looks a bit complicated when you first see it. What is
interesting about it is that it shows that households own all the resources!

Try thinking of something like a cob of corn and follow its journey from seed to kitchen
table. If it looks like the flows double back on themselves, you're right. A farmer
produces corn which he sells to DelMonte, receiving payment. DelMonte makes cream
corn, cans it and then sells it to the grocery store, where the farmer's wife works. The
grocery store pays for the can of corn, pays the wife's salary, and tries to make a profit.
The wife uses the money from her paycheque to buy the can of cream corn for dinner.

Now pick another product and see if you can follow the journey yourself. If you work in
a retail store think of how your favourite product is produced, who gets paid, how does
it arrive in your store and how you get paid to sell it? Next where do you spend that
money?

So not only do consumers make all the decisions in a capitalist or market economy, we
also own all the resources! How cool is that?

Review Questions
Answer the following questions:

1. What countries came closest to implementing a command market system?

2. What two insurmountable problems did the governments in a command market system
face?
3. What key fundamental questions does a market system address?
4. Name and differentiate the three main types of business organization.
 5. What countries came closest to implementing a command market system?
North Korea, Eastern Europe, China and Soviet Union
6. What two insurmountable problems did the governments in a command market
system face?
They had problems coordinating the millions of individuals, decisions by
consumers, resource suppliers and businesses. The failure of any one single
industry to achieve its output target caused a chain reaction of repercussions.
They also faced an incentive problem. When they misjudged how many
automobiles, shoes, etc. were wanted persistent shortages and surpluses of good
existed. There was no incentive for mangers to adjust their production as they
were assigned production goals that they had to meet and were not given
resources to create more of those products where a shortage existed.
7. What key fundamental questions does a market system address?
What goods and services will be produced?
How will the goods and services be produced?
Who will get the goods and services?
How will the system accommodate change?
How will the system promote progress?
8. Sole proprietorship: an unincorporated firm owned and operated by one person
Partnership: an unincorporated firm owned and operated by two or more people
Corporation: a legal entity registered with the government that operates as a
body distinct and separate from the individuals who own it

Circular Flow
It might seem very complicated to figure out how goods and services are created and
sold. But there is in fact a systematic flow to the way that goods and services flow
through economies. We as consumers need money to buy the goods and services we
want. We earn this money by supplying our resources to the companies that create the
goods and services. Did you know that you are one of the most important resources in
our economy?

Questions
Answer these questions in your journal:

1. Think of the circular flow of our economy. Where exactly do you fit in? (Hint: Most of us
affect the circular flow in more than one way.)
2. How do the concepts in this video relate to your own experiences?
Test—Chapter 1 and 2
This test focuses on questions about the market as a sytem and the production factors
that result in a circular flow. It is based on Chapter 1 and 2 of Microeconomics (15th
Canadian edition).

You have 40 minutes to answer 20 questions. After that time, the test is closed and your
work is automatically submitted. Only one attempt is allowed.