Money! C T. Murray & S. Hayes ©

What is money? Something that is used to buy goods and services (A good is a physical product) (A service is an action provided) T. Murray & S. Hayes ©

Functions of Money Means of Exchange Measure of Value Means of Deferred Payment Store of Wealth Money is a means of exchange. All over the world, in every sort of “buying situation”, money can be used as the currency of purchase. Instead of bartering “good for good”, money establishes a unit of measure. Every single good and service can be quantifiable in terms of euro, sterling, dollars etc. By using a credit card or a cheque that hasn’t yet been cashed, you can avail of a good or service and pay for it later. Money is also a means of accumulating wealth. If we build up a store of a million lollipops and use them to barter, we don’t know how much it will be worth when it comes to using them as a unit of exchange against the products we wish to buy, (because it depends on whether the seller of your product will want or need the lollipops at all). However, if we build up a store of a million euro, it means that we can buy a million euro worth of products when we choose to buy. Also, we know that a million euro means that we can buy more with that, than we can with a thousand euro. However, if we were to offer somebody a thousand lollipops, they might not see it any differently than a million lollipops as they may have no use for them. Therefore, increasing the amount of lollipops doesn’t make you more wealthy, but building up your store of money does. T. Murray & S. Hayes ©

Characteristics of Money Instantly Recognisable Easily Portable Reasonably Durable Divisible into units of small value Scarce in relation to demand for it Take up the analogy of lollipops (or whatever commodity you feel is relevant) here again. If you were to take a hundred lollipops to Spain and try to buy your dinner with it, you couldn’t because the owner of the restaurant couldn’t use it to pay her staff, suppliers etc. However, if you were to use euro, the restaurant would happily take it in exchange for your dinner. Similarly, imagine carrying all of your spending money in the form of lollipops! Instead, money is very light and small. You don’t have to carry it around with you all the time either. You can take some out of an ATM, use a Laser card etc. There isn’t a bank for lollipops! Also, you couldn’t offer half a lollipop, all you could do is offer multiple lollipops for goods. Imagine buying a car or an expensive dress, you would need a trailor! Finally, what make a ten euro note any different from the paper around a KitKat? If an alien visited Earth, how would you explain the difference between the two pieces of paper? It feels a little different and looks a lot different, but so do a lot of things! The only thing that sets money apart from every other thing in the world is that there is a worldwide, insatiable demand for it. People will always want more of the ten euro note and all you can do with a KitKat paper is tear it off the bar and throw it in the bin. Again, there are so many things you can buy with money because it is a unit of exchange for every good or service in the world. You can no choice at all with a KitKat bar wrapper. It just comes down to demand…. Which leads one of the most asked questions asked… T. Murray & S. Hayes ©

Why can’t we just print more money to solve all problems? If we all had more money than we needed, we wouldn’t need to work for more money… and neither would anybody else! If we wanted a loaf of bread, who would bother to set up an expensive bakery to make it? Who would set up a shop to devote their time to selling bread when they had all the money they wanted? They could go on holidays, but who would bother to make a plane or a car to bring them there? They could read books, but who would write them, publish them, sell them? They could go shopping, but to what shops? In fact, if we just kept printing money, we would probably starve and have nothing to do! In some countries, they have printed some more money, if they are in serious debt. However, this has an inflationary impact. If you have more demand and the same amount of goods, the demand schedule will have to move to result in a higher equilibrium price. T. Murray & S. Hayes ©

T. Murray & S. Hayes ©

Forms of Money Cash – notes and coins in circulation Credit – loans, credit cards, borrowings T. Murray & S. Hayes ©