If someone is heading off to buy sandwiches or sundials, then the prices are most likely stated in terms of the medium of exchange. If the economy uses U.S. dollars, then sandwiches carry a U.S. dollar price. If the economy uses Japanense yen, then the price of sundials is in terms of yen--Japanense yen.

The reason is that sellers are willing to trade for, and buyers are willing to give up, THE medium of exchange--money--when undertaking this exchange. That is why money is THE medium of exchange. It is used for exchanges.

Noting Prices

• Johnathan McJohnson is a typical suburban consumer. Each month he and his family buy a wide range of goods and services used to provide satisfaction and to enhance their living standards. One such purchase is electricity used to operate his 52-inch plasma screen television, his central air conditioning system, and his electric weed whacker and grass trimmer. The price of the electricity that he buys is $1 per kilowatt hour.


• Manny Mustard operates a popular restaurant near the Shady Valley Sprawling Hills Shopping Mall, which serves the popular Deluxe Club Sandwich to lunch hungry patrons. To prepare this product, Manny purchases an assortment of inputs--including bread, lettuce, tomatoes, bacon, ham, turkey, and barbecue sauce--from Freshable Produce, a local grocery wholesale distributer. The price Manny pays for a crate of tomatoes is $10.


• Winston Smythe Kennsington III is a wealthy industrialist and financier who suspects that his sister, Geraldine Constance Kennsington, is secretly seeking to undermine his leadership of OmniConglomerate, Inc. To ward off such an effort, he has hired the services of Seth Mullholland, a former covert military operative, to acquire unflattering and possibly incriminating information on his sister, which he hopes will convince Geraldine to discontinue her efforts. The price that Winston is charged for Seth's services is $10,000 (in small denomination, unmarked bills).

Many Possible Prices

Alternatively, prices might be stated in terms of a physical unit or activity. The price of a Deluxe Club Sandwich, for example, could be stated in terms of the amount of labor required to generate the income needed to make purchase, such as a half an hour working at the minimum wage.

While the prices of some goods and services are occasionally stated in units other than the medium of exchange, this is usually designed merely to highlight some aspect of the exchange. For example, the purchase price of a car might be stated in terms of the number of months an average person needs to work generate the necessary income. This emphasizes the relative effort involved in making this acquisition compared to some other good.

Such alternative prices can be informative, but when push comes to shove, when the nitty meets the gritty, and when exchanges take place, prices end up stated in the monetary unit.

A Bit About Value

Buyers place twice the value on the Live Headless Squirrels music CD than on the Deluxe Club Sandwich. Buyers are willing to give up twice as much money to buy a Live Headless Squirrels music CD as to acquire a Deluxe Club Sandwich. Sellers incur twice the opportunity cost of producing a Live Headless Squirrels music CD as the cost of producing a Deluxe Club Sandwich.

This is the reason that money functions as a measure of value. Because money is commonly accepted in payment for all goods and services, because money is the universal medium of exchange, prices provide a relative comparison of value.

The Other Three Functions

• Medium of Exchange: This function means that money is accepted throughout the economy as payment for goods and services. Buyers acquire goods by giving up money. Sellers receive money when parting with their goods. This is, without question, the most important function of money. This is the function that makes money MONEY.


• Store of Value: This function means that money can be used to purchase the same quantity of goods and services, that provide the same consumption value, in the future as it can purchase today. Inflation is the primary nemesis for the ability of money to store value.


• Standard of Deferred Payment: This function means that money is used to designate future payments, such as those for loan repayments. The standard of deferred payment is a natural result of the standard unit of account and store of value functions of money.