MONEYMONEY

Why do we need money?Why do we need money?

►Key Economic Concepts: Key Economic Concepts: ►Barter Barter ►Exchange Exchange ►Markets Markets ►Price Price

►Task: Make a list of things you Task: Make a list of things you would like to sell on Ebay. would like to sell on Ebay.

►Think about your room at home: Think about your room at home:

Are there items in their closet that Are there items in their closet that you never use? you never use?

Have your parents been telling Have your parents been telling you to "get rid of that ..."? you to "get rid of that ..."?

►Next make a list of things you Next make a list of things you would like to buy on Ebay--using would like to buy on Ebay--using the proceeds from the sale of the the proceeds from the sale of the items you have listed above.items you have listed above.

BarterBarter

►Barter depends on a "double Barter depends on a "double coincidence of wants." coincidence of wants."

►It only works when one trader It only works when one trader is willing to exchange his is willing to exchange his product for something the product for something the other trader has and the other trader has and the second trader second trader

wants what the first wants what the first trader has. trader has.

BarterBarter

BarterBarter

►The barter system can work when The barter system can work when there are limited goods for sale; there are limited goods for sale;

BarterBarter

►However, as economies developed and However, as economies developed and people had more goods to trade people had more goods to trade (ceramics, beads, arrows, bows, etc.), (ceramics, beads, arrows, bows, etc.), finding a good to trade became more finding a good to trade became more difficult. difficult.

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BarterBarter

►Barter also requires that an exchange Barter also requires that an exchange rate be set.rate be set.

= 100.605=1.56

Conclusion:Conclusion:

►Money is important in an economy. Money is important in an economy. Transactions for goods and services Transactions for goods and services are very difficult to complete without are very difficult to complete without money that serves as: money that serves as:

1.1.A medium of exchange A medium of exchange 2.2.A unit of account A unit of account 3.3.A store of value. A store of value.

►Finally, setup a marketplace for Finally, setup a marketplace for these goods in your classroom. these goods in your classroom.

►There is no money in this There is no money in this economy. economy.

►Draw pictures of these items onto Draw pictures of these items onto the the paper sheetspaper sheets provided. provided.

►Then use them for the activity. Then use them for the activity.

Market Place - Activity

► In this activity everything must be In this activity everything must be purchased via barter and trade. The purchased via barter and trade. The buyers and sellers will have to work buyers and sellers will have to work out prices between them. out prices between them.

Eg if one student wants a new video Eg if one student wants a new video game that another student is game that another student is selling, and the prospective buyer is selling, and the prospective buyer is offering old baseball cards, the offering old baseball cards, the buyer and seller will have to decide buyer and seller will have to decide how many cards must be how many cards must be exchanged for one video game. exchanged for one video game.

Market Place - Activity

►Back in the real world, as people Back in the real world, as people developed more and more developed more and more goods and trade became more goods and trade became more difficult, buyers and sellers difficult, buyers and sellers began to use certain goods for began to use certain goods for money. money.

►If a trader could not find a good If a trader could not find a good that he or she wanted that he or she wanted personally, some good with personally, some good with market value could be accepted market value could be accepted instead. instead.

►Examples might be corn, salt Examples might be corn, salt (among the Romans), gold or (among the Romans), gold or wampum (polished strings of shells wampum (polished strings of shells used in Colonial America). used in Colonial America).

►A doctor who is hungry might want A doctor who is hungry might want to exchange his or her medical to exchange his or her medical services to a farmer for foodservices to a farmer for food

►But if the farmer is feeling fine and But if the farmer is feeling fine and has no need for the doctor's medical has no need for the doctor's medical services, what would make that services, what would make that farmer want to give up his food? farmer want to give up his food?

►This is where money becomes This is where money becomes useful. In the example of the useful. In the example of the doctor and farmer, the doctor could doctor and farmer, the doctor could simply give the farmer money simply give the farmer money instead of medical services. The instead of medical services. The farmer would accept money more farmer would accept money more readily than the doctor's services readily than the doctor's services because money is always valuable.because money is always valuable.

► In order to be useful, money must In order to be useful, money must satisfy three important functions:satisfy three important functions:

1.1.It must serve as a medium of It must serve as a medium of exchange. In other words, it must be exchange. In other words, it must be generally accepted as a means of generally accepted as a means of payment by all parties. Did you ever payment by all parties. Did you ever wonder why a restaurant owner is wonder why a restaurant owner is willing to give you a pizza for a piece willing to give you a pizza for a piece of paper with a picture on it? of paper with a picture on it?

MoneyMoney

2.2. It must serve as a unit of It must serve as a unit of account. In other words, it account. In other words, it must provide a common unit must provide a common unit for measuring the value of for measuring the value of every good and service. This every good and service. This allows those who are selling to allows those who are selling to set prices. set prices.

MoneyMoney

3.3. It must serve as a store of value. In It must serve as a store of value. In other words, it must retain its other words, it must retain its purchasing power over time. purchasing power over time. People do not want to make People do not want to make purchases every time they sell purchases every time they sell something. You can see that items something. You can see that items like corn, or other goods that spoil, like corn, or other goods that spoil, are not very good substitutes for are not very good substitutes for money because they cannot money because they cannot function as a store of value. function as a store of value.

MoneyMoney

► In your opinion would the in-In your opinion would the in-school market be better if the school market be better if the buyers and sellers could use buyers and sellers could use money in their transactions. money in their transactions.

Explain your answers. Explain your answers.

► Would the market have been Would the market have been more efficient with money?more efficient with money?

►In the earlier periods of history, In the earlier periods of history, families produced all they families produced all they consumed and consumed all consumed and consumed all they produced. There was no they produced. There was no need for money. But this need for money. But this changed once began to changed once began to specialize. specialize.

SpecializationSpecialization

SpecializationSpecialization

►When some people became When some people became hunters and others became hunters and others became farmers, for example, they often farmers, for example, they often made transactions by trading or made transactions by trading or bartering. This was relatively bartering. This was relatively simple at first because the simple at first because the number of goods being traded was number of goods being traded was so limited.so limited.

►For instance, a farmer might want For instance, a farmer might want some meat for his family and a some meat for his family and a hunter might want vegetables for hunter might want vegetables for his family. The most logical means his family. The most logical means for both men to obtain what they for both men to obtain what they want is to trade what they have. want is to trade what they have.

SpecializationSpecialization

►The hunter gives the farmer part of The hunter gives the farmer part of animal he just hunted and in return animal he just hunted and in return the farmer gives the hunter a the farmer gives the hunter a basket full of fruit & vegetables. basket full of fruit & vegetables.

►But the barter system has flaws.But the barter system has flaws.

SpecializationSpecialization

►A A monopolymonopoly is defined as a is defined as a persistent persistent marketmarket situation where situation where there is only one provider of a there is only one provider of a product or service, in other words product or service, in other words a firm that has no competitors in a firm that has no competitors in its industry. Monopolies are its industry. Monopolies are characterized by a lack of characterized by a lack of economic economic competitioncompetition for the for the goodgood or or serviceservice that they provide and a that they provide and a lack of viable lack of viable substitute goodssubstitute goods..

MonopolyMonopoly

►An An oligopolyoligopoly is a is a market formmarket form in in which a market or industry is which a market or industry is dominated by a small number of dominated by a small number of sellerssellers

OligopolyOligopoly

Economic equilibriumEconomic equilibrium is simply a is simply a state of the world where economic state of the world where economic forces are balanced and in the forces are balanced and in the absence of external influences the absence of external influences the (equilibrium) values of economic (equilibrium) values of economic variables will not changevariables will not change

Economic EquilibriumEconomic Equilibrium

*P - price*P - price*Q - quantity of good*Q - quantity of good*S - supply*S - supply*D - demand*D - demand*P0 - price of market *P0 - price of market balancebalance*A - surplus of demand - *A - surplus of demand - when P<P0when P<P0*B - surplus of supply - *B - surplus of supply - when P>P0when P>P0

Price of Market Balance

Supply and Demand Supply and Demand ModelModel

► The price P of a The price P of a product is determined product is determined by a balance between by a balance between production at each production at each price (supply S) and price (supply S) and the desires of those the desires of those with purchasing power with purchasing power at each price (demand at each price (demand D). The graph depicts D). The graph depicts an increase in demand an increase in demand from D1 to D2, along from D1 to D2, along with a consequent with a consequent increase in price and increase in price and quantity Q sold of the quantity Q sold of the product.product.

A A cartelcartel is a formal (explicit) agreement is a formal (explicit) agreement among firms. Cartels usually occur in among firms. Cartels usually occur in an, where there are a small number of an, where there are a small number of sellers and usually involve the same or sellers and usually involve the same or similar products. similar products.

Cartel members may agree on such Cartel members may agree on such

matters as:matters as:► price fixing, price fixing, ► total industry output, total industry output, ► market shares, market shares,

CartelCartel

CartelCartel

►allocation of customers, allocation of customers, ►allocation of territories, allocation of territories, ►bid rigging, bid rigging, ►establishment of common establishment of common

sales agencies, sales agencies,

CartelCartel

►and the division of profits or and the division of profits or combination of these. combination of these.

►The aim of such collusion is to The aim of such collusion is to increase individual member's increase individual member's profits by reducing competition.profits by reducing competition.

►Competition laws forbid cartels.Competition laws forbid cartels.