Social & Global Studies

Unit 3 The Market

The Magic of Markets →


PART A → Microeconomics

MODEL 1  Production Possibilities Frontier (PPF) & Pareto

PPF also known as PPC = Production Possibilities Curve


1.  PARETO Efficiency


An allocation is Pareto efficient if there is no other allocation in which some other individual is better off and no individual is worse off (i.e., along the frontier).


  • There is no connection between Pareto efficiency and equity! In particular, a Pareto efficient outcome may be very inequitable. For example, the outcome in which I have all the goods in the world is Pareto efficient (since there is no way to make someone better off without making me worse off).
  • Pareto efficiency is an absolute notion: an allocation is either Pareto efficient or it is not.

2.  Perfect Information & Competition 

 the model assumes both of these in terms of fully allocated resources.

3. The PPC / PPF is a snapshot, a moment in time.

4. Ceteris Paribus is in operation → Latin phrase that translates approximately to “holding other things constant” and is usually rendered in English as “all other things being equal“. In economics and finance, the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.

5. Given your understanding of Company ACompany B, and Company C curves, identify the curve that best represents a sophisticated industrialized / developed economy AND the curve that best represents a developing / emerging economy.


7. Constant Ratio Line 

 No specialization / No specialized resources.

8. A concave curve means an economy’s resources are not all equally productive in all activities.

MODEL 2 → Demand Supply Market Model

SIMULATION → Demand for Dark Chocolate Covered Almonds & Price Signals

4 Meanings of a Market

→ a physical place.

→ a network of buyers and sellers for a particular product.

→ the demand for a product.

→ a price determination process.



2 Major Purposes of a Market

→ price setting mechanism.

→ system of exchange.


The Ability to Determine Prices in a Perfectly Competitive Market Relies on 4 Characteristics

→ many participants in the market where no single one participant dominates demand or supply (dispersed market power).

→ many buyers where no single buyer dictates prices to sellers.

→ products in a market are identical where quality is not a price factor.

→ participants enjoy perfect knowledge concerning price levels and market conditions.

LEVEL 1 → Demand, Supply, & Market Equilibrium

2 Central Questions About Markets

→Why are markets so effective? (the real function of markets is to generate accurate __________ information)

→ What accounts for the rise and fall of prices in a free market?




Follow-up Questions

→ How can both PRICE and DEMAND increase simultaneously?

→ Why is equilibrium price considered price stability in a market?

→  How does competition and market power, or lack thereof, play into demand & supply economics?

♦ CASE STUDY → Coffee Market in Canada


VICE → Countdown to Extinction (Red Snapper Scenario START at minute 14:50 to end)

♦ CASE STUDY 1 → Atlantic Bluefin Tuna Market in U.S.A.


CASE STUDY 2 → Licensed Child Care in Toronto



PART B → Macroeconomics

Patterns & Making Economic Meaning


Opening Critique of Macroeconomics

“the solution is the problem”     Nobel Laureate Vernon Smith

“macroeconomics is a zombie discipline”     Economist Joseph T. Salerno

CENTRAL QUESTION = Does the economic response to the recent global financial crisis mark the death of macroeconomics as a viable way to manage the economy?

Economic Binary and the Modelling Trap

→ Postmodern thought brought with it the rejection of the absolute.

→ Postmodernism was a movement toward a more relative and fluid understanding of reality (in our case economic).

→ The postmodern mind rejected the certainty of an unchanging, foundational truth or ideology.

→ This critique applies to economics quest for an objective and neutral model to predict / forecast.

→ Objective economic policy is neither neutral nor objective as it creates and recreates meaning through the binary thinking or 

     DUALISMS that order our economic world.

→ Macroeconomic indicators, models and policies divide the world into a series of over-generalized binary oppositions that
     privilege one side over the other.


→ There is a human tendency to see patterns in anything.

→ From very early in human history, humans could make out obscure patterns in nature and create a story or fortune 

     based on what they saw.

→ Markets, which are driven by human emotions such as greed and fear and behaviors also fluctuate in patterns or cycles.

→ Economic cycles, like natural cycles, exhibit the polarity of booms and busts.

→ We try and understand our uncertain surroundings by identifying patterns in order to create predictability.

→ Trying to understand economic and financial data might seem like reading the future in tea leaves.

→ Just filtering the relevant from the noise can be a huge undertaking.

Identify the following patterns using the data provided in the following slides:

The Pattern Trap

1.  Connecting the __________ .

2.  Big __________ .

3.  Putting things into __________ .

4.  You can’t see the forest for the __________ .

→ Step back from the details to gain a broader perspective of the whole.

♦ Link this “forest for trees” idiom to your understanding of the global financial crisis, its causes, and the players involved.  What represents the trees and what represents the forest?  (hint – look to the concept map and the linear story your group created).

Economically developed societies devote considerable resources to collecting economic and social indicators to help policy makers in their deliberations about how to best increase quality of life. These measures have had notable successes, and yet they suffer from substantial limitations.

Ten Indicators

Macroeconomics defn.     → a policy conclusion that spending more money can cure anything (J. T. Salerno Mises Institute).

                                        → the analysis of economic performance and the prediction of future performance.

                                        → studying the whole economy (all markets, all industries, all firms, all demand, all supply).

                                        → key ecomonic indicators:

                                                                   ♦ GDP (Gross Domestic Product) * the dominant indicator for prosperity

                                                                   ♦ Inflation (CPI = Consumer Price Index / Interest Rates)

                                                                   ♦ Unemployment Rate / Employment Trends

                                                                   ♦ Consumer Confidence / Expectations

                                                                   ♦ Stock Prices

                                                                   ♦ Money Supply

                                                                   ♦ CEO Confidence

                                                                   ♦ Internet Access (Internet Penetration)

                                                                   ♦ Loan Growth

                                                                   ♦ Retail Sales



a)     Each expert group will research the web to generate the knowledge to answer 5 basic questions about the economic

        indicator assigned and POST the following in the SHARED DOCUMENT linked HERE:

i.       What does it measure?

ii.      Is it a leading, lagging or coincident indicator?

iii.     Is it a procyclical, countercyclical or acyclical indicator?

iv.    How do economists use it?

v.     What are the drawbacks to its use?



b)     Each group member individually records the information gathered for the 5 questions as a reference to use in the



c)     Discussion groups are made and students teach back to the group their expertise on their indicator.


d)     Discussion groups graphically organize / sort the 10 indicators using group-generated criteria (question i, ii & iii support

        the structuring of the graphic organizer).


e)     Organizers are collected and scanned into the course website to view / use next class.



Indicators Classified by Usual Timing:


1.  Leading Indicators → change before economy as a whole changes (short-term predictors of the economy such as Stock

                                       Market Returns, P/E Ratio, Yield, Index of Consumer Expectations, Building Permits, Money

                                       Supply, Loan Growth).

2.  Lagging Indicators → change after the economy as a whole changes (Unemployment Rate, Earning Stmts., Customer


3.  Coincident Indicators → change at same time as whole economy changes / information about the current state of the

                                            economy (GDP, industrial production, personal income, retail sales).


Indicators Classified by Direction:

1.  Procyclical Indicators → move in same direction as whole economy (GDP).

2.  Countercyclical Indicators → move in opposite direction as whole economy (Unemployment Rate rises as economic

                                                   performance drops).

3.  Acyclical Indicators → little to no correlation to business cycle (may rise or fall when whole economy doing well or



 GDP – The Pulse of an Economy Limits of GDP as an Indicator of Economic Growth and Social Progress

Fiscal Policy Drawbacks

Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things.  Our GDP counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts guns and the television programs which glorify violence in order to sell toys to our children.

Yet the GDP does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion, it measures everything in short, except that which makes life worthwhile.

Adapted from Robert F. Kennedy Address

Beyond GDP

Is Life Getting Better Article

Three Models

Question Sets

Adidas Model

L  I  Model

Two Sets of Tools

Fiscal Policy

Listen to the podcast The Secret Workings of the World’s Central Bankers (CBC The Current 29 April 2013)

Monetary Policy


The Role of Banks

Five Things to Know About the Role of Banks (From the Perspective of Banks Themselves)

Everyone needs banks, but not everyone understands how banks work, or the role they play in the world’s economy. Here are five questions and answers to help explain.

1. What do Banks Do?

Banks play an important role as an intermediary, or go-between, in the financial system. They have three main functions:

Banks are where people can safely deposit their savings, which banks then pay interest on. If there were no banks, people would have to store and protect their savings themselves, which would involve major risks.
Banks are largely responsible for the payments system. Electronic payments are becoming more important as people use less cash. This means that banks are processing more card payments, transfers, direct debits, etc. every day.
Banks issue loans to both people and companies. Without banks, it would be very hard for people to buy a home or start a business, or for companies to make investments, for example.

Banks do a variety of other things, such as helping corporations with their, often more complex, financial needs. This can range from the various ways to gain access to capital for growth and investments, to assisting in mergers and acquisitions, to converting currencies.

2. Why is this Important?

Our economy couldn’t function without banks. By attracting savings and granting credit, banks are the oil for the wheels that keep the economy turning.

Without banks we’d have to pay for everything with cash, which we’d have to save somewhere. That’s obviously very risky.

Without banks as a go-between, savers and borrowers would have to find each other personally, and a single transaction between a saver and a borrower would be very costly: just think of the fees you’d have to pay a solicitor to draw up a contract.

Plus, the saver would be assuming a big risk—if the borrower can’t repay, the saver would lose all their savings. A bank lends money to a lot of people and companies. If some are unable to repay their loans, the bank can absorb these losses and savers won’t be affected.

Banks also help solve the issue that customers generally want ready access to the money they deposit, while many loans require long-term commitments, such as a 30-year mortgage for financing a house.

So banks borrow (i.e. hold customers’ deposits) short-term but lend long-term. By doing this they transform debts with short maturities (deposits) into credits with very long maturities, managing the risks associated and collecting the difference in the interest rate as profit. This is known as “term transformation” and is a vital part of banking.

3. Why and How Does Using a Bank Minimize Risk for Customers?

Managing and monitoring risks are at the heart of banking, and most banks have strict policies in place at various levels to handle both financial and non-financial risk, including social and environmental risk.

But more generally speaking, banks make transactions possible that otherwise wouldn’t have been possible, or that only would’ve been possible with huge risks. One reason why banks can handle such transactions, and private individuals and companies can’t, is scale.

Even though savers can generally withdraw their savings at any time, the total amount of money held by a bank doesn’t fluctuate much because they have many customers. This scale helps banks cover risks, such as those related to term transformation mentioned above.

Other risks, such as a borrower not being able to repay, are reduced through diversification, meaning that banks can spread risks over various countries and industries.

This doesn’t mean that risks are non-existent, but they’re spread over the bank’s portfolio and initially absorbed by the bank’s margins, with “equity capital” there to cushion unexpectedly high losses.

Above all, banks specialize in estimating possible risks. However, it’s important to realise that risks can never be eliminated completely. In fact, that wouldn’t be a good thing either. A certain level of risk is necessary to keep the economy going.

Economic growth is driven by entrepreneurs who start up new enterprises, i.e. take risks. Sometimes they fail, but if no one would take such risk, there would be no economic growth.

4. How does a Bank Make Money?

A bank can make money in a variety of ways. Most of a bank’s revenue comes from the interest they receive on the money they lend. Interest is, however, also a major cost for a bank, as savers receive interest on their savings.

Very basically, banks earn money by charging more interest on loans than that they pay on savings.
Interest income is used to cover the costs involved in keeping interest-rate risk under control, to cover losses on loans that are not repaid or not repaid in full, and to pay the bank’s overhead, such as wages.

Besides interest income, banks also make money from other transactions and services, such as providing financial advice and products to large corporations.

5. How Does this all Apply to Banks?

We see our role as a financial institution as supporting and stimulating economic, social and environmental progress. We create value by providing products and services that help people to improve their lives and fuel economic growth.

Easy Monetary Policy → SEE ABOVE and reverse policy to increase the money supply, decrease interest rates, and increase injections (C + G + I + X)

Macroeconomics Documentary Film Study

Overdose: The Next Financial Crisis
→ traces the causes of the financial crisis and demonstrates how current government policies are replaying those same causes, setting the world economy up for an even bigger version of the present crisis. As Vernon Smith states: “The solution is the problem, and that is why we had a problem in the first place.”

Film Analysis → PART 1  View & Sort Key Events Chronologically

PDF COPY of the key events covered in the documentary (Scrambled).

Film Analysis → PART 2  Complete the Following Macro Analysis of the Crisis

PDF COPY → Macro Analysis Worksheet
Film Analysis → PART 3  Extend Your Macro Expertise by Critiquing the Central Bank’s Role in the Crisis
PDF → Macro Map


SUMMARY of Fight Club and its comment on consumerism and counter culture → Whether the product is Naomi Klein’s No LogoFight Club, or Adbusters magazine, the market is very adept at meeting consumer demand for anti-consumer products. It could be argued that rebellion and non-conformity is the driving force of the market, rather then a treat to capitalism and free markets.

Fight Club

Anti-consumerism is perhaps best explained as a criticism of what other people buy. But we all buy.  We all demand.  The fact that what we demand is mainstream or anti-capitalist makes no difference to the market.  It is all demand and supply.

Thorstein Veblen in the late 19th century said that after we have bought the necessities of life, we are purchasing honorific goods. Your purchases seek to push someone else off in a kind of zero-sum game.

 According to anti-consumerists, status-seeking is an artificial need that is instilled by the system. It is possible, according to countercultural theorists, to opt out.

However, whether you choose to spend your money or not, your money is still being spent. The money you leave in the bank as an expression of your anti-consumerism is simply lent out by the bank to people who will spend it.

When you see alternative and counterculture paraphernalia being marketed, this is not the system co-opting dissent. It is the market responding to popular demand.

PART C → Competitive Consumption & the Market

Central Idea from the book Rebel Sell   The market is driven by a desire to be distinct → Distinction drives competitive consumption → Competitive consumption creates markets willing to sell you anything.

Joseph Heath: The Myth of the Rebel Consumer

The Rebel Sell (Joseph Heath & Andrew Potter)

Joseph Heath in Conversation with Allan Gregg

CLAIM BY CRITICS OF FREE MARKETS → Mass production increases the supply of goods, yet it also reduces the income of workers, leading to a shortfall in demand.

Fallacy of generalized overproduction is committed by critics of consumerism and capitalism.

PROBLEM / ERROR → Marx ignores the fact that a market economy is fundamentally a system of exchange meaning → TOTAL DEMAND must = TOTAL SUPPLY [equilibrium means there cannot be an excess of goods generally in the economy as one person’s supply is another person’s demand → two sides of the same coin …].