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INFLATION CAUSES: Inflation is a persistent increase in the economy's average price level. The two basic types (or causes) of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation, as the name clearly indicates, results when economy-wide shortages are created by increases in aggregate demand. Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.

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VALUE IN USE:

The satisfaction of wants and needs provided by the direct consumption of goods and services. Acquiring value from the use of goods and services is really the ultimate goal of economic activity. It is the final step in the production, allocation, and consumption activities that are undertaken to address the fundamental problem of scarcity. Value in use should be contrasted with the similar phrase, value in exchange.
Value in use is another phrase for satisfaction, for the satisfaction generated by consuming a good or service. This particular phrase is most useful when compared with the notion of value in exchange.

The distinction between value in use and value in exchange is important for money, especially the difference between commodity money and fiat money. Commodity money has value in exchange AND value in use. In contrast, fiat money has value in exchange but little or no value in use.

Goods have value in use when they provide satisfaction. When a good is also used as money, then it has value in exchange, too. For commodity money, value in use largely determines value in exchange. If, for example, bread is used as commodity money and one loaf of bread provides the same value in use (satisfaction) as two apples, then the value in exchange is one loaf for two apples. The prices of other goods, the value in exchange, is specified in a similar fashion based on value in use.

People are willing to accept commodity money in exchange for good because (1) they can obtain satisfaction by consuming the commodity or (2) they can trade the commodity for another satisfaction-generating good.

The earliest forms of money were commodities precisely because they provided value in use to virtually everyone in an economy, such as grains used for food and animal skins used for clothing. People were originally willing to accept something like a loaf of bread in payment for another good because they were hungry, because the bread had value in use.

However, because others were also hungry, people soon realized that they could accept a loaf of bread in payment even if they were NOT hungry because they could then trade it for another good. They could trade it to someone else who WAS hungry. Knowing that EVERYONE was willing to trade for bread gave it value in exchange.

Although human civilization flourished through the centuries using commodity money with value in exchange AND value in use, modern economies have realized that value in use is NOT an essential quality for money. Modern fiat money functions quite well with little or no value in use. A hundred dollar bill provides very little direct satisfaction of wants and needs. Its value comes from the wants-and-needs-satisfying goods that it can be used to buy. Money is only valuable NOT for what it IS, but for what it can BUY.

<= VALUE IN EXCHANGEVARIABLE COST =>


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VALUE IN USE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: October 22, 2020].


Check Out These Related Terms...

     | value in exchange | commodity money | fiat money | barter | barter economy | double coincidence of wants | M1 |


Or For A Little Background...

     | money | money functions | money characteristics | value | price | market | government functions | satisfaction | exchange |


And For Further Study...

     | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | monetary economics | Keynesian economics | aggregate market analysis | business cycles |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |


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