Table of Contents

What is money ?

Medium of exchange

There are millions of things that you could do with your time. However, it is not possible to do all of them, hence you have to choose one which best suits you.

Similarly, others choose to do things according to their preference.

As a result, humans end up with a surplus of a single commodity to which they devote their time.

Human time is limited but wants are limitless. Hence humans trade things they have in surplus with the things they desire. 

Coordination mechanism

Money acts as a signal that helps coordinate actions of millions of humans.

For example imagine prices of pencil increase because there is shortage of wood because of forest fire in Africa, from where the manufacturers get their raw material.

People will start using pens instead of pencils because the price of pencils shoots up.

Other places with trees will start supplying wood to pencil manufacturers as they will find it profitable to sell their raw material because of increased prices of pencils.

All this happens without everyone knowing the details of forest fire in Africa.


We believe(based on our past experiences) that the money I receive in exchange for my labor will be useful in buying goods/services in the future.

Till the time everyone believes this, the system continues to play its role as money.