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

  • Explain the various functions of money
  • Contrast commodity money and fiat money

Money for the sake of money is not an end in itself. You cannot eat dollar bills or wear your bank account. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a “blessing that is of no advantage to us excepting when we part with it.” Money is what people regularly use when purchasing or selling goods and services, and thus money must be widely accepted by both buyers and sellers. This concept of money is intentionally flexible, because money has taken a wide variety of forms in different cultures.

Barter and the double coincidence of wants

To understand the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter —literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants    , a situation in which two people each want some good or service that the other person can provide. For example, if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of different jobs and goods.

Another problem with the barter system is that it does not allow us to easily enter into future contracts for the purchase of many goods and services. For example, if the goods are perishable it may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of strawberries. Additionally, while the barter system might work adequately in small economies, it will keep these economies from growing. The time that individuals would otherwise spend producing goods and services and enjoying leisure time is spent bartering.

Functions for money

Money solves the problems created by the barter system. (We will get to its definition soon.) First, money serves as a medium of exchange    , which means that money acts as an intermediary between the buyer and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting services for money. This money is then used to buy shoes. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital.

Second, money must serve as a store of value    . In a barter system, we saw the example of the shoemaker trading shoes for accounting services. But she risks having her shoes go out of style, especially if she keeps them in a warehouse for future use—their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you do not need to spend it immediately because it will still hold its value the next day, or the next year. This function of money does not require that money is a perfect store of value. In an economy with inflation, money loses some buying power each year, but it remains money.

Questions & Answers

What is economics?
Bubu Reply
by this time
Emmanuel
It is a social science that analyses production,distribution and consumption of goods and services
Emmanuel
A social science that study human behavior in relationship with decision making
Jessica
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
mwangala Reply
What are the limitation and significant of macroeconomic
Usman Reply
explain the significance of concerpt of opportunity cost in planning
Mwanaid Reply
what is meant by the price elasticity of demand?
Martine Reply
when price of a commodity increase it's demand contracts , and whe the price of a commodity decreases it's demand expands so the degree of change in demand in response to change in own price of the commodity is called PED . Ed = percentage change in quantity demanded / percentage change in price
shaswat
What are the limitations of macroeconomic and their segnificant
Usman Reply
Discuss the role of competition in stimulating economic growth?
Daniel Reply
competition stimulate economic growth because in such types of economy,they is no monopoly power every supplier will want to produce to meet customers choice which brings about quality production and attract invested and customers into such economy
Koka
competition creates Monopoly because of economy of scale. it's not antithesis but different side of same coin
toko
competition result in high economic growth since every firm will intend to provide quality services and products to meet customers needs and requirements unlike in Monopoly situation where a firm just provide what it want to resulting in large stock piles of unwanted products ,ie inefficiency, howev
Mark
microeconomics study part of the economy but macroeconomic study the whole economy
Olokun Reply
studying the whole economy, solving the problem of the economy and building up the economy
Olokun
micro means small while macro means large
Olokun
standard of living is the footsteps of an economy because it plays important role for country to have crucial view about their budget ,import and export
Olokun
it will be differ because economic agent will only take their views on some part of household
Olokun
can opportunity cost be zero
OBED Reply
how many types of transportation do we have
Jacob
yes. when a customer's purchasing power is high, he may have d ability to purchase all he needs, dt makes opportunity cost zero
George
please can give more explanation on this question
OBED
what are the factors production
PETER Reply
Labour capital entrepreneurs
Leta
Land,capital, labour,and the entrepreneur
Tantoh
I will like to know use of calculus in economics
JHUMA Reply
do they use it in economics?
Pranav
I want to know if I should take calculus or statistics and probability my senior year of highschool
Yahir
yes for example in monopolistic competitive market..... TR=TC* & THIS CALCULATED BY CHANGING( DERIVATIVE LAW) MR =MC ** WILL BE THE FORMULA THAT USE.
Leta
please in which topic in economic is the question coming from.
Tantoh
from PCF in economics
Leta
why is unitary proportional to responsiveness
Etim Reply
any tip for igcse economics exam?pls
Stacey Reply
well
The
What is a market
Divine Reply
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
price of the related goods 2 price of the given commodity 3 income of the consumer 4 taste and preference 5 expectation in the future price
John
pls the taste and preference
Nas
explain briefly
Nas
a consumer taste and preference commodity changes for a time the man becomes
John
sorry sorry
John
is when the price of a commodity becomes high and can't afford example Samsung instead of iPhone
John
consumers who have high intense for goods will purchase the goods even if the price of that commodity increases because he or she preferred that commodity.people will be prefer iphone as its price increase
Yussif
as usual bad taste of preference is when a consumer regrets from one commodity to another in terms of the price
John
thanks alot
Nas
you're welcome
John
#Preference; #Income #Test
Dereje
#price Of Commodity #Income #Taste #Preference
Dereje
#Market is The Place Where Buyers And Sellers Are Exchanging Their Goods And service. #
Dereje
difference between macro and micro economics
Lawrence
Microeconomic Study about individual consumers market But Macroeconomis Study General economic Process Such As #Aggregate Demand #Aggregate Supples #GDp= #GNp
Dereje
nice so can u run down a brife discussion on GDP
Lawrence
good
Chinex
pls can someone differentiate between the perfectly elastic, perfectly inelastic and unitary
yhar Reply
and then again pls what are the types of elasticity, the methods of calculating it thank u
yhar
Perfectly inelastic is when the coefficient is equal to zero Unitary is when the coefficient is equal to one But am not sure if we have perfectly inelastic
John
I'm kind off confuse abt the PED, IED and co are they the types of elasticity we've
yhar
Yh the types are price elasticity cross and income elasticity of demand
John
do we've specific formulaes to calculate for each of them
yhar
yes. PED. changes in quantity demanded divided by changes in price
Vealmurugan
so pls what's the general name given to unitary, elastic n inelastic ? are the names given to the final result after doing the calculations?
yhar
P2-P1÷P1×100or Q2-Q1×Q1×100 PED
John
***tutor2u.net/economics/reference/price-elasticity-of-demand
Vealmurugan
They are elasticity coefficient
John
@John I don't get u well pls
yhar
whichone
John
P2-P1÷P1×100or Q2-Q1×Q1×100 PED @john pls tis is what m talking abt
yhar
Yh is the formula for PED
John
Pls are you having a for PED
John
thank u very
yhar
dy
Jobang
what is economics
Tayyeb
economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative use
John
is a science which study human behavior as a relationship between ends and scarce means which have alternative uses
Divine
yes this is because economic provide a body of knowledge on human economic principles under theories and these theories can be verified with real world data using science method in other words it was scientific method in arriving at solution identification of problem or basic data collection among
John
unitary ElasticWhen Elasticty =1 Perfectily Elastic When 0<1 inelastic when 0>
Dereje

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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