This is where buyers and sellers meet Any convenient set of arrangement where buyers and sellers communicate to exchange goods and services
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Sub markets
– a market within a larger market
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Money and Exchange
Specialisation has enabled people to enjoy a SOL – impossible to achieve through self-sufficiency
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Exchange
used to mean barter – impossible to run an economy from bartering as a medium of exchange Development of money that enabled trade and specialisation to prosper
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Medium of exchange
most important function of money – used to buy and sell goods and services Bartering required a double coincidence of wants – each party wants what the other has to trade – costly and difficult (impossible) = difficult to trade
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A measure of value
cts as a unit of account High inflation destroys the ability of money to perform this function
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A store of value
Wages are not spent the same day they are received – may be convenient to spend the money later if the value will remain the same High inflation destroys this; link because money in the future will have less worth than money today
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A method of deferred payment
If people lend money today they would only do so if they would be able to buy the same amount of goods when it is paid back When money ceases to have this function this is damaging to investment and economic growth
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Cash - notes and coins
No intrinsic value (unlike gold) Issued by the government or with permission of the government Law as a means of payment must accept legal tender- The higher the rate of inflation = less it can be said that it is ‘good’ money
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Current account features
1. Cash can be withdrawn from the account on demand if it’s in credit – deposits can be immediately converted into money 2. Account holders provided with a cheque book and debit cards which are used to purchase goods
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Disadvantages
Firms can refuse cheques and debit cards Little/no interest is earnt on deposits = inflation could defect value
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Near monies
Assets, which fulfil some but not all functions off money Act as a measure of value – cannot be used as a medium of exchange Can be converted into a medium of exchange –the easier this is the more liquidity it has
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Examples of near monies
Most obvious near monies = time deposits with banks and building societies / shares - easily sold but can take a month to receive the money
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Features of near monies
Pay higher rate of interest than current accounts Depositors need to give notice before withdrawals Many accounts offer interests penalties if money is needed in an instant
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What are near monies
Non-money – financial assets All financial assets can be converted into money However interest penalties are high Long waiting list for withdrawals Can be a considerable loss of money with conversion Economists do not class these assets as money
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Value of shares
change rapidly – not a good store of value – when share prices fall – or a method of deferred payment – when share prices rise
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Money substitue
Money = not the only mean of payment for goods and services Credit cards have also become a medium of exchange – not a store of value though This is because the possession does not show that you have money in your account
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What do credit cards repersent
It only represents your ability to borrow money instantly Therefore they are money substitutes
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Do markets clear
Market price = could be at any level Excess supply or demand at any point Market prices don’t tend to change
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Arguments for makert clearing price
Neo-classical free market economists: say markets do not tend to clear E.g. coffee market – many producers that desire to make a large profit When there is excess demand – producers will bump up prices and their profits and still sell their produce
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Excess supply -
some coffee remain unsold = choice to lower price or not If all producer decided not to lower prices then this will have a greater pressure to reduce prices in the future = unsold stocks in the market
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How to reach a stable equilirium position
Some producers will lowers prices and competition forces the others to follow. Production and price will go on falling until equilibrium output and price is reached = stable equilibrium position
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Free market forces
Free market forces = pressure which force the market towards an equilibrium point Critics of market mechanism argue that free market force can lead away from the equilibrium point in man cases. Other markets argue that market forces are too weak
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