The basic worth of things is determined by demand (desire to have it), supply (whether it is available) and resources (you have what is required to acquire the thing you want – basically a good or a service).

Believe it or not these 3 simple things are the fundamentals of economies around the world.   We would not be human though if we did not add massive complexity to this.

It all starts with Barter

In the barter world you can substitute goods or services in every category.    For example I desire wheat to make spaghetti (demand).  Wheat is available, lots of farmers have wheat warehoused and just waiting for me (supply).  The farmers don’t have tomatoes but I do (resources.)  Put these three things together and you have a barter transaction.  I give the farmer tomatoes from my home garden (keeping some back for my spaghetti sauce).  The farmer gives me wheat, transaction concluded and everyone gets what they want.  One question about this though is was it a fair trade?

Over time, civilized beings that we are, we substituted the resource part of the barter transaction from a good or service to money.

What is money worth?

Back to my post’s of the last two days,  money’s value is dependent on how much you have (how hard it is to get), how badly you want to use it (desire for a good or service) and how readily the good or service you want can be acquired (is it easy or hard to find).

Basically the value of money is in our heads, collectively, in economic groups, like say a county.  So unlike a real resource used in barter money is only worth what we think it’s worth.

Digression

What I mean by a real resource with real worth is for example; a tomatoes base real worth is that it sustains life.   Money does not do that, if you have money but can’t find tomatoes to buy you will still die, having money or not.

Some basic Economics

If our economic group (our country) decides to put money into the system that usually results in inflation (there are lots of ways to put money into the system – see my earlier post on the fractional reserve system for an example).    That is as more money is available (i.e., resources) we are willing to use that money to get more of what we want and as the ability to acquire more (increasing demand)  tends to limit supply, prices go up.   Also though more hunting/gathering occurs to increase supply to meet the demand.  Positive economic activity rises.

Now reverse this, the supply of money diminishes, less is used to acquire things (i.e., reduced demand) , so less things are produced, economic activity drops, this is often called a recessionary cycle.

This recessionary cycle results in less money overall in the economics group, lower demand, lower prices and this is called deflation.

Usual Disclaimer

These ideas I have been discussing over the last couple of days have been presented in a very simplified format.  My plan is to post on a number of financial concepts and over time build in (build up to) more complex concepts.  I believe simple explanations will help to build a solid framework for these concepts that can be built on.

Please do comment on these posts; questions, challenges are welcome and they will help guide future topics.