money (economics)

why is money important in our world?

money came as a direct result of civilization i believe. like language, it was a standardized way to do something, in this case give value to something. before this, it was bartering but the difficulties of that is that both parties may not have the desired product the other party wants. money made trading much easier.

how do we determine the monetary value of something?
wikipedia has many answers because it is a very important question.

the terminology in the article on value is supper confusing because this theory has been discussed by so many economists so i’m going to use some of my own terminology.

but even if you’ve taken only one class of econ, you know the following: supply vs demand curve gives you price.
in the beginning, value was determined by only the supply side.

imagine you live in a village, and you want to buy some fish from another villager. because you’re all friends, you know how much work your friend does to get all of that fish. you also know how long it would take you to catch the same fish and the price you would get for it. in this case, the price you get for it is pretty much equivalent to the value of all the work he did or else you wouldn’t buy it. this is called Labor theory of value or Cost of production theory of value.

but you see, the important assumptions made here is that you know how much work was done to get that fish, and you also know how much it is supposed to cost, and you don’t actually care if you get that fish or not. it makes sense for staples, goods needed for survival, but is not quite as applicable for luxury goods, so this model has to be modified, we add in the demand curve.

similarly, the supply curve is related to the cost into creating or obtaining the product (or the intrinsic value if you will. it’s called “value” in marx’s theory)
the demand curve is related to the subjective value of the product determined by the buyer, AND the value to which the buyer associates from obtaining the product (or the subjective if you will. it’s called “use-value” in marx’s theory)
both of these are values of the object. but they are useless on their own. the BUYER and SELLER need to compromise until they can agree on an exchange value (, value for which seller will sell) is settled on.

to make this theory slightly more beautiful, we need to treat it a bit like calculus, to consider the infinitesimal step. this comes from the consideration that each subsequent unit of the product obtained (supply part) may have a different subjective value (demand part) associated to it. one car is nice, two cars is awesome but three cars is too many. this whole second part is called marginal utility, and seems fine.

but the implications of the concept of money is huge. everything is now relative to this abstraction. the construction of the price an of objects can now be infinitely complex. previously, we only considered the simple example of buying food in a village. but let’s consider the price of a mac laptop. how did we come to the price? of course, there’s the buillding cost of the actual laptop. but then it gets complicated: the other costs related to the marketing, operations, r&d cost recovery of the product. psychological pricing ending in 99.99, premium pricing for the specific market segment, price discrimination because of currency differences etc. there can be infinitely many and infinitely complex pricing factors.

the thing you should take away is that pricing can be so complex that it is almost arbitrary. but pricing is usually determined by the masses, personalized pricing happens less often. even healthcare, the cost maybe tailored to your health needs, but the price of each service has been determined by someone else already.
however, each person’s subjective value of things can be different. we can exploit this economically and purchase things that have a low price determined by the masses, but you think has a higher value.

decision making in life works like the pricing theories above. you assign a cost to everything you do, and the return it gives you or its value to you. for every action you do, as long as the cost is lower than the return, then you will keep doing it until there is no more advantage.
studying until you ‘re too tired to do so anymore. following your dreams until you are too financially broke. a human’s value system is always changing so these decisions are also always changing. you assign a higher value to intoxicated fun when you are younger and in college. you may regret things you did in the past because your value system was different. the most important thing is to know what your value system is.


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