THE EVOLUTION OF MONEY

The History of money has been movement away from barter to commodity monies such as gold and silver coin, and then from commodity monies to commodity standards, and then to fiat money.

Exchange Costs: Trading goods and services entails costs. We can divide these costs into two separate costs..
1. 2. Waiting cost Transaction cost.

Waiting Costs: Are the costs an individual must incur as time passes before desired good is obtained. The longer we
wait the higher are the costs an individual has to incur. Example: In the example of grocery store if we want to purchase any item, such as a chocolate bar then we must wait to purchase that item, and the time spend waiting imposes a cost on us. Its called waiting costs.

Transaction Costs:
Transaction cost are the costs an individual must incur to make a trade. Making trade in short time interval requires an individual incur a high cost than if the individual takes a longer time to make the trade.

Example: to obtain a chocolate bar we must a trip to a grocery store and exert ourselves to shop for and purchase a chocolate bar. These tasks require energy and efforts and thereby force us to incur explicit costs which economist lump together as Transaction Costs.

TOTAL EXCHANGE COST AND THE MINIMUM COST EXCHANGE

To make any exchange for a good and service, and individual must incur both waiting and transaction costs. By summing waiting and transaction costs schedule we get a new schedule that measure the total exchange costs incurred by an individual, it is U shaped. Total Exchange Costs: Total exchange cost are the sum of waiting and transaction cost therefore the total cost schedule is obtain by summing waiting and transaction cost together at each possible time interval.

THE MINIMUM COST EXCHANGE

The goal of an individual who seeks to make an exchange is to minimize total exchange cost that he or she incurs. This is shows as the point of minimum cost, CE on the total exchange cost schedule. At this point, the individual spends the optimal amount of time, T, making an exchange.

Exchange Cost And The Evolution Of Money: Waiting Costs And Trading Systems: Waiting costs are unrelated to the type of trading system and economy uses if we have a desire to obtain a chocolate bar. The cost we incur by waiting to by a chocolate bar will be same whether we plan to purchase it by using any trading system. For a given individual and desire good and service, the position of the waiting cost schedule is invariant to the form of the economy's trading system.

Transaction cost and trading system: as an economy evolves from barter system to more sophisticated monetary systems, the transaction cost associated with making an exchange falls for any given exchange time interval. Example: under pure water system, with its need for double coincidence of wants, these transaction costs are very high for any given time interval. Establishment of a trading post system lowers transaction costs by providing buyers more information about the location of sellers and other trading systems like commodity money, commodity standard and fait money system further reduced transaction costs.

EXCHANGE COST AND THE EVOLUTION OF TRADING SYSTEMS AND MONEY.

As an economy evolves from barter system to more sophisticated monetary systems, transaction cost fall, and so total exchange cost fall. Hence, the minimum cost of exchange is reduced, and the time spend making exchange decreases. Because waiting cost are unchanged during the evolution while transaction cost fall, then minimum cost fall. In general, evolution to fiat money system leads to both less costly exchange and less time allocated to that task