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GED Social Studies: Fundamental Economic Concepts Concepts

Importance ★★★★☆ · 30% (estimate)

Overview

This chapter covers the basic ideas economists use to explain choices, businesses, and trade.

Every choice has an opportunity cost: the value of the next best option you give up. Incentives, such as rewards or penalties, shape choices. Entrepreneurs start businesses and take the risk, hoping to earn a profit, which is total revenue minus total costs.

Markets work best with competition; a monopoly is a single seller with no close substitutes. Specialization, where each worker or country focuses on one task, raises productivity. Countries gain by trading when each makes what it has a comparative advantage in, meaning what it gives up the least to produce.

Key concepts

  • Opportunity cost

    The value of the next best option you give up when you choose.

    Memory tipOnly count the best option you gave up.

  • Profit

    Total revenue minus total costs.

    Memory tipRevenue = price x quantity sold.

  • Monopoly

    A market with one seller and no close substitutes.

    Memory tipNo competition often means higher prices.

  • Incentive

    A reward or penalty that motivates people to act a certain way.

    Memory tipTax credits are common incentives.

  • Specialization

    Focusing on one task or product, which usually raises productivity (output per worker).

    Memory tipAssembly lines are specialization.

  • Comparative advantage

    Making the good you can produce at the lowest opportunity cost, then trading.

    Memory tipCompare what each side gives up, not just who makes more.

Often tested

  • Profit questions: find revenue, add all costs, then subtract.
  • Comparative advantage: divide to find each country's cost of one unit in terms of the other good.

3 sample questions

Verified practice questions from this unit.

Practice questionReviewedEconomics › Fundamental Economic Concepts★★★★☆

Question 1. Maria can spend Saturday working an extra shift for $120 or going to a family picnic. She chooses the picnic. What is her opportunity cost?

  1. ① The cost of gas to drive to work
  2. ② Nothing, because the picnic is free
  3. ③ The $120 she could have earned
  4. ④ The cost of the food at the picnic
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Answer: ③ The $120 she could have earned

Key point: Opportunity cost: the value of the next best choice

Opportunity cost is the value of the next best option you give up when you make a choice. Maria's next best option was working, so her opportunity cost is the $120 she did not earn.

Wrong choices

  • The cost of gas to drive to work: She did not drive to work, so she did not spend that gas money.
  • Nothing, because the picnic is free: Even a free choice has an opportunity cost: the value of the best option you gave up.
  • The cost of the food at the picnic: The food cost is part of the picnic itself. Opportunity cost is what she gave up by not choosing the other option.
Practice questionReviewedEconomics › Fundamental Economic Concepts★★★★☆

Question 2. A market in which one company is the only seller of a product that has no close substitutes is called a

  1. ① partnership
  2. ② free trade zone
  3. ③ monopoly
  4. ④ perfect competition
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Answer: ③ monopoly

Key point: Monopoly: a single seller with no close substitutes

A monopoly exists when one company controls the whole supply of a product. Without competition, a monopoly can charge higher prices. Antitrust laws, such as the Sherman Antitrust Act (1890), aim to prevent unfair monopolies.

Wrong choices

  • partnership: A partnership is a business owned by two or more people. It says nothing about how many sellers are in the market.
  • free trade zone: A free trade zone is an area with few trade barriers. It is not about having one seller.
  • perfect competition: Perfect competition has many sellers offering the same product.
Practice questionReviewedEconomics › Fundamental Economic Concepts★★★★☆

Question 3. A city offers homeowners a $500 tax credit if they install solar panels. What is this an example of?

  1. ① An incentive to encourage a certain behavior
  2. ② A monopoly
  3. ③ Inflation
  4. ④ A tariff on imported goods
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Answer: ① An incentive to encourage a certain behavior

Key point: Incentive: a reward that encourages a choice

An incentive is something that motivates people to act, such as a reward or a penalty. Governments often use tax credits as incentives to encourage behavior they want, such as using clean energy.

Wrong choices

  • A monopoly: A monopoly is a market with one seller.
  • Inflation: Inflation is a general rise in prices.
  • A tariff on imported goods: A tariff is a tax on imports. This credit lowers taxes for homeowners.
Practice 5 questions from this unit →

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