Understanding Money

Everyday Use of Money

• Money is utilized daily for various purchases like groceries, clothing, and services (e.g., plumbing).

Definition of Money

• Money serves as a magical form of payment accepted universally.

Origins of Money

Barter System

• Barter Example:
  • Billy (lumberjack) has surplus wood.
  • Mary (egg farmer) has surplus eggs.
• Trade Dynamics:
  • Billy wants food.
  • Mary wants firewood.
  • An exchange rate develops (e.g., 1 egg = 1 log).
  • Exchange rates can fluctuate based on supply and demand.
• Double Coincidence of Wants:
  • Requires finding someone who wants what you have and has what you want.
  • Increases complexity as more individuals enter trade (e.g., Jack, an apple farmer).

The Emergence of Money

• Solution to Barter Limitations:
  • People sought a universally desired commodity (e.g., diamonds) for easier trading.
  • Money is defined as a medium of exchange.

Characteristics of Money

1. Divisibility:
   • Money must be divisible for varying exchange rates (e.g., half an egg is impractical).
2. Portability:
   • High value per unit weight; large items (e.g., cattle) are impractical.
3. Durability:
   • Retains value over time; perishable items (e.g., eggs) are unsuitable.
4. Recognizability:
   • Easy identification of money; uniformity is essential for counting.
5. Scarcity:
   • Must be limited in supply to maintain value; common items lose desirability.

Historical Commodities as Money

• Examples include tobacco, sugar, salt, shells, and beads.
• Dominant Commodities:
  • Gold and silver are most common due to meeting all five characteristics:
    • Ornamental value, divisibility, portability, durability, recognizability, and scarcity.

Conclusion

• Reflect on the characteristics of money when making transactions:
  • Is it divisible, portable, durable, recognizable, and scarce?