role of money.pdf

Sophia Girls’ College , Ajmer (Autonomous ) E LEARNING CONTENT DIGITAL LEARNING CENTER Content Developed By Semester : III BA ECONOMICS Dr. Sr. Rani Augustine Paper : Money, Banking and Department of Economics Financial Markets  Copyright Sophia G...

Sophia Girls’ College , Ajmer (Autonomous ) E LEARNING CONTENT DIGITAL LEARNING CENTER Content Developed By Semester : III BA ECONOMICS Dr. Sr. Rani Augustine Paper : Money, Banking and Department of Economics Financial Markets  Copyright Sophia Girls’ College (Autonomous) Ajmer ALL RIGHTS RESERVED It is illegal to copy, adapt or edit this video. Distribution including rental , resale and export of this video is strictly prohibited. Public display or any other form of transmission is strictly prohibited The Role of Money in a Capitalist Economy ⚫ A capitalist economy is one in which each individual in his capacity as a consumer, producer and resource owner is engaged in economic activity with a large measure of economic freedom. ⚫ Individual economic actions are governed by the instruction of private property, profit motive, freedom of enterprise and consumers sovereignty. ⚫ All factors of production are privately owned and managed by individuals who are at liberty to dispose them of within the prevalent laws. ⚫ Individuals have the freedom to choose any occupation, and to buy and sell any number of goods and services. ⚫ Such an economy is essentially a money economy where money plays an important role in its functioning. Consumers and producers receive income in money. ⚫ Money and the Price Mechanism in a Capitalist Economy: ⚫ In a capitalist economy where means of production are owned privately and production is also carried out by private enterprise, money performs the important function of solving the central problems of such an economy. ⚫ This is done through the price mechanism. The price mechanism operates automatically without any direction and control by the government. ⚫ Since such an economy functions without any government interference, money plays a crucial role in maximizing the wants of consumers and profits of producers. ⚫ For the Consumer: ⚫ Under capitalism, the consumer is the king who buys only those commodities which give him the maximum satisfaction with a given money income. ⚫ This he does by equalizing the marginal utilities of different goods he wishes to buy. ⚫ When the price of each commodity expressed in money equals its marginal utility, the consumer gets maximum satisfaction. ⚫ Thus money enables a consumer to make a rational choice out of the various commodities he wants to buy with his given money income. ⚫ For the Producer: ⚫ Money is equally important for the producer who buys and sells inputs and outputs in money. ⚫ His aim being to maximize profits, he calculates the marginal cost and marginal revenue in money. Profits appear when marginal revenue exceeds marginal cost, and they lead to further production. ⚫ When marginal cost exceeds marginal revenue, losses appear and production is curtailed. But these situations do not continue for long. The price mechanism restores the equilibrium between marginal revenue and marginal cost at prices which do not need further adjustments. Thus producers earn normal profit which they receive in the form of money. ⚫ Basis of Capitalist Production: ⚫ In fact, money is the very basis of the capitalist production. ⚫ By facilitating the purchase of inputs, and by increasing specialization and division of labour, money helps in the growth of research in the agricultural, industrial and tertiary sectors of a capitalist economy. ⚫ Money helps in capitalist production through a circular flow of goods and services from these sectors. ⚫ Basis of Credit: ⚫ The entire capitalist system of production is based on credit. ⚫ Credit instruments are a form of money which is issued by banks to facilitate trade, commerce, agriculture, industry, transport, etc. under capitalism. ⚫ It is on the basis of credit instruments that banks advance loans to the different sectors of a capitalist economy Means of Capital Formation: The growth of a capitalist economy depends upon the capital accumulation. The different stages in the process of capital formation under capitalism—receiving income, saving and investing—are all performed in money terms. Link between the Present and the Future: ⚫ Money establishes a link between the present and future through the freedom of enterprise and freedom of consumption under capitalism. ⚫ The freedom of consumption the part of the consumer leads to freedom to save a part of his money income. ⚫ Saving leads to the production of capital goods via investment and capital goods contribute to the growth of the economy. Leads to Business Cycles: ⚫ Besides these apparent merits of money in a capitalist economy, it has one serious defect in that an excess of money leads to inflation and its shortage leads to deflation. ⚫ These changes in the quantity of money result in cyclical fluctuations with their attendant consequences on the economy. ⚫ But Schumpeter regarded business cycles as the cost of economic development, a permanent feature of the dynamic path of a capitalist economy which takes it to a higher level of development every time a cycle takes place. ⚫ In fine money plays a crucial role in the functioning of a capitalist economy.  E LEARNING CONTENT DIGITAL LEARNING CENTRE Content Developed THANK For any queries by: Dr. Sr. Rani Augustine YOU contact Department of Economics Mr. Jeet Mistry [email protected]