Don,
I do not believe that the exchanges listed differ from the exchange in which a sundae is bought for $5. Money is simply another economic good, whether that form of money is currency, coins, or gold.
The importance of 'end states' explains why. The exchange is carried out by the individuals making the exchange in order to pursue a state of the world that is more satisfactory than the state of the world prior to the exchange. Thus, the exchanged goods are merely means in reaching that more pleasing 'end state', and are valued by how the individuals believe those goods will aid in reaching that 'end state'. Again, it is the vision of the 'end state' that drives the exchange; the goods are merely accessories to that goal.
When you exchange two $5 FRNs for a $10 FRN, it is no different, nor for any of the other listed exchanges.
For an 'everyday reality' example -
Living in the city of Boston and not owning a car, I like to have many $1 FRNs in my wallet because I never know when I might need a cab ride, and it is unpleasant for me to ask the cabbie for change. If the metered total for the ride is $6, I like to give $7 rather directly (one $5 FRN + two $1 FRNs), rather than giving $10 and asking for $3 in change. If the metered total for the ride is $11, I like to give $13 directly (one $10 FRN + three $1 FRNs) rather than giving $20 and asking for $7 in change. Call it the awkwardness of social interaction.
Also, subway rides cost $1 if you do not have a monthly pass (which I do not), and there is no way to use $5 FRNs and get change back.
Thus, multiple $1 FRNs are usually more valuable to me than their equivalent larger denomination FRNs.
As a result, each morning when I pay for a coke bottle which usually costs $1.25, I often use a $5 FRN even if I have a $1 FRN and a quarter in my wallet, so that I can receive three $1 FRNs (+ three quarters) in change.
So, if I start with a $5 FRN, a $1 FRN, and a quarter in my wallet, I can imagine two 'end states' after my coke bottle purchase:
A)Having a coke bottle in my possession, having a $5 FRN my wallet
B)Having a coke bottle in my possession, having four $1 FRNs in my wallet, having four quarters in my wallet
I prefer 'end state' B over A, and thus four $1 FRNs are more valuable to me than one $5 FRN, as the former serve as means to achieve the 'end state' I prefer.
Another example -
Starting out with $380 in FRNs in my possession, the possible 'end states' I might imagine are:
A)Having an extra ounce of gold in my possession but no longer having $380 in FRNs in my possession
B)Having $380 in FRNs in my possession but not having an extra ounce of gold in my possession
I might well prefer to pursue 'end state' A over B if I am worried about the possibility of inflation or social chaos, and thus an ounce of gold would be more valuable to me than $380 in FRNs.
Summary -
Money is just another economic good, whatever form it takes, whether it be currency, gold, coins, etc. Different denominations of 'equivalent' amounts of currency can hold different subjective marginal utilities for different individuals. |
