Vending Machine:
Building an Economy
In order to develop an understanding of the way an economy functions,
let’s attempt to build a simple economy around a single vending machine
in your school cafeteria.
On the paper provided, create your simple economy using the following instructions:
1. Draw a black box (3 cm x 3 cm) in the center of the page and label it “vending machine.” With no
economy yet in place, the machine is empty. No cold drinks for you! To build an economy, the owner
of the vending machine must purchase soft drinks and juices from a producer and use these to fill the
machine.
2. So let’s draw a black circle 3 cm in diameter to the right of the vending machine. Label this circle
“producer.” Since the owner of the vending machine gives the producer money, draw an arrow in
colour #1 from the vending machine to the producer to represent this event. Draw an arrow in colour
#2 to represent the products coming to the vending machine operator in return for the money being
paid. The machine is now full, but the economy is still not in place.
3. We need consumers for the cold drinks, and this is where you come in. Draw a black circle 3 cm in
diameter to the left of the vending machine. Label this circle “consumer.” Even though you are very
thirsty, before you can buy a cold drink you must have money. The most satisfying way to get money is
to earn it, and one way to do this is by finding a part-time job. As luck would have it, the local
beverage manufacturer (the producer) happens to be hiring students. Draw an arrow in colour #2 to
represent the service of labour that you provide to your employer. Draw another arrow in colour #1 to
represent the wages that your employer pays you in return for the work you do.
4. Now that you have money in your pocket, you might decide to quench your thirst from time to time
with a nice cold drink. Draw an arrow in colour #1 to represent the money you put into the vending
machine to purchase cold drinks. Draw a #2-coloured arrow to represent the cold beverages you
receive from the machine. At this stage, we are starting to see our economy come to life.
5. As a salaried employee, you cannot expect to spend all the money you earn in wages because you
must pay a percentage of that money to the government in taxes. Don’t feel too bad about this—the
operator of the vending machine and the beverage producer must also pay taxes on their income. First
draw a black rectangle 3 cm long below the vending machine. Label this rectangle “government.” Then
draw three arrows, using colour #1, to represent the income taxes paid to the government by the
consumer, the producer, and the seller. In return for your tax dollars, the government will supply your
economy with important goods and services, such as the school you attend, the roads you use to get to
that school, and the laws that set quality standards for the foods you eat. Using colour #2, draw three
arrows to represent the products and services that consumers, producers, and vending machine
operators receive from the government.
6. Oddly enough, the government also plays the role of consumer in our model economy because the
government itself rarely does the work it sponsors, for example, building bridges and roadways.
Instead, the government contracts the work out to the lowest bidder. In our case, the government
purchases large quantities of beverages for meetings and conferences. Draw the two coloured arrows
to represent this transaction.
7. It would be very foolish to spend your whole paycheque as soon as you made it. If you did, how
could you ever afford the really expensive things such as cars, housing, and tuition? For this reason, our
economy needs a bank—an institution that allows people to save some of their money for a later use. In
return for depositing our money there, we receive financial services from the bank. First draw a black
rectangle 3 cm long above the vending machine. Label this rectangle “bank,” then draw two colourcoded arrows to represent this transaction: savings going into the bank and services coming back in
return. Producers will also need the services of a bank from time to time, so draw two more arrows to
represent this relationship.
8. Similar to the government, banks play more than one role even in a simple economy such as ours.
Vending machines are very expensive, so where did the operator find the money to finance the
purchase of a vending machine? In this case, our owner borrowed the money from the bank; in other
words, the loan allowed the owner to spend money the owner did not actually have at the time. In
return, the owner signed an agreement to repay the bank over a period of time and with interest—the
additional sum of money the owner had to pay for receiving the loan. Draw two colour-coded arrows to
represent this final transaction. There are other transactions that could be included in our model, but
by now the pattern and complexity of the economy are obvious.
Questions
1. Study your diagram. Based on the simplified model created, explain what an
economy is in your own words.
2. Does the simplified model you have created contain all of the features listed in
the textbook definition in Figure 1.2 on page 7?
3. How comprehensive is your definition compared to the one found in the text?
Can you expand on the textbook definition?
4. Why would economists use simplified models, like this one, when they can be
challenged as being too simple to be realistic?