Mediums of Exchange Money

Bartering When goods or services are exchanged directly (baseball cards).

Reasons bartering faded: 1) population increased quickly 2) the number of goods and services increased which made it impractical.

2 Reasons money was invented 1) to replace bartering 2) to simplify exchanges

Direct vs. indirect exchange Barter (direct) Money (indirect)

Everyday example of indirect exchange 1) Joe buys a car from a dealer for $20,000. 2) dealer will accept $20,000. to buy another car to sell and pay expenses

Invention of money Approx. 4,000 years ago

1 st mediums of exchange Gold, silver and copper

2 reasons precious metals were chosen 1) valued for their uses 2) scarcity gave them value

5 reasons precious metals were viewed as universal: 1) everyone agreed they were valuable 2) easily made into “units’ 3) durable 4) small amounts were valuable, so easy to transport it 5) never lose their value (scarcity)

Price Value of good/service measured in $

Advantage of $$ over barter Ratio fluctuates slowly

Advantage of $$ in an economic system Allows a price to be placed on everything based on one commodity (U.S. dollar)

Labor theory of value States that time and effort will equal value (not as true anymore)

Value Based on what consumers are willing to pay (secondary factor – supply)

Example of value Van Gogh paintings because during his lifetime few sold -- today they sell for millions. Public estimations changed

Hard Money Gold and silver 1)scarcity 2) having other uses

Soft Money Today’s currency/coins 1) not scarce 2) has no other uses

Fiat Latin “let it be” Government prints $ and declares its value

Commodity Money When $ is backed by a tangible thing (Gold and Silver standards)

Paper Currency and coins today All fiat

Inflation An over-supply of $ in relation to other goods ( $ is worth less)

Deflation An under-supply of $ in relation to other goods ($ worth more)

The “Law of Supply and Demand affects everything!