Although exchange represents of basic activity in markets, we need to break the theory of exchange down into component parts in order to understand it fully — also to begin to understand the critical role that money plays in exchanges.
You can consider everything that you do as an exchange. You eat breakfast in the morning in exchange for hunger. You get dressed in exchange for being naked — or wearing your pajamas all day long. Then, when you go to the store, you exchange something of value for something you value more.
Since most exchanges in the modern world consist of an exchange of money for goods, I have decided to put the details of the theory of economic exchange in the category of Money & Banking. You will see from the brief outline below that my description of the theory of economic exchange leads from voluntary exchange to the use of money.
It has been said that all human activity consists of exchanges. We will study the theory of exchange in extensive detail throughout this website.
Prices convey a significant amount of important information about markets. Limited models can prove useful in demonstrating theories about market pricing.
Markets emerge from the exchange of goods and services. Those exchanges determine the allocation of resources. Free markets comprise voluntary exchanges free from intervention. Free markets represent a natural condition that operates effectively and efficiently without intervention.
As you have seen from the introduction to exchange, money plays a vital role in the efficient operation of large markets. I will cover some of the basics of money in this section and go into more detail in the category devoted entirely to money.