Functions of money

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Money allows people, communities, and firms to specialize in the production of goods and services.
Problems with barter:
  1. It is not easy to find a fair price and find a related product for something which is rare
  2. It is hard to find someone to swap with because there is double coincidence of wants and maybe there is no one that wants a cow in your village so you are not able to get vegetables.
  3. It is hard to save, products occupy lots of space and some can rot.
Money has developed for many years.
What makes a good money?
  1. Acceptability- The pieces of paper we use as euros are used as money because people accept their value.
  2. Durability- The good must be resistant, strong and durable so that they can act as a store of value
  3. Portability- Easy to carry around. Lightweight and can be folded.
  4. Divisibility-  Notes and coins have different value to be able to divide them and pay exact amounts.
  5. Scarcity- Limited in supply or scarce if people or firms have to value it. Only if it is scarce people will value it and use it for exchange.
The functions of money are:

Money is a medium of exchange

With money, you can trade objects for cash very easily. It doesn't matter whether it is winter or summer, your money will still have the same value. Imagine you had an apple, you can trade it for something else but you can't keep it for too long because it will rot and it will lose all its value. Instead, with money, you can keep it for a long time without it changing its value or becoming useless. Also, people are more likely to accept money because in most cases, when you offer someone something in exchange for a good or service, it is not exactly what they want.

Money is a measure of value

Let's go back to the apple that you had, how can you know how much it is worth? Could you be able to exchange it for a pencil or for a rubber? By using money, you know exactly how much it is worth and you can make correct predictions about what you can get in exchange.

Money is a store of value

You can keep money for a very long time and it will still be worth the same. This means that money is a store of value because the value is kept safely and you don't lose money for storing it for a long time.

Money is a means of deferred payment

Having money means that you can pay for something without actually having the money at the moment. You can write down what you owe someone on a piece of paper (for example a cheque from a bank) and pay them later, of course with an interest so that the bank gets money. This allows people to pay for goods and services that have big costs and pay for them monthly. The person to whom you owe the money also gets a small percentage so both of you come out happy afterwards.

The dollar, a form of money

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