GED Social Studies Fundamental Economic Concepts Summary

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.

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.

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.

Specialization means each worker focuses on one task. Workers get faster and better at their task, so more is produced per worker. Productivity is the amount produced per worker or per hour.

Wrong choices

• A monopoly lowers prices: The example is about one factory's workers, not about market control.
• Inflation raises output: The example has nothing to do with rising prices.
• Opportunity cost always falls to zero: Opportunity cost does not disappear. The example is about dividing work.

Work it out step by step:

1. Revenue: 400 tacos x $3 = $1,200.
2. Total costs: $500 + $150 + $250 = $900.
3. Profit: $1,200 - $900 = $300.

Check: $900 + $300 = $1,200.

Wrong choices

• $700: $700 subtracts only the food cost. Fuel and other expenses must be subtracted too.
• $900: $900 is the total cost, not the profit.
• $1,200: $1,200 is the total revenue (money taken in), not the profit.

Compare opportunity costs:

1. Country A: 1 hour makes 10 shirts or 5 radios, so 1 shirt costs 0.5 radio and 1 radio costs 2 shirts.
2. Country B: 1 hour makes 6 shirts or 6 radios, so 1 shirt costs 1 radio and 1 radio costs 1 shirt.
3. A gives up less to make shirts (0.5 radio vs. 1). B gives up less to make radios (1 shirt vs. 2).

So A should make shirts, B should make radios, and they should trade.

Wrong choices

• Country A makes both products because it makes more items per hour: Country A cannot make everything more cheaply. Its opportunity cost for radios is higher than Country B's.
• Country A makes radios, Country B makes shirts, and they trade: This reverses the plan. Country A gives up less to make shirts, and Country B gives up less to make radios.
• Each country makes both products and does not trade: Not trading means each country gives up the gains it could get by specializing.

An entrepreneur combines resources (land, labor, and capital) to start a business, hoping to earn a profit. Entrepreneurs take the risk that the business may fail.

Wrong choices

• an employee: An employee works for a business but does not take on the risk of owning it.
• a regulator: A regulator works for the government and enforces rules.
• a consumer: A consumer buys goods and services. A consumer does not start the business.