Economics
Core ideas
Economics on the GED is mostly about choices made under scarcity and how markets respond to change.
Concepts to master
- Scarcity and opportunity cost: every choice has a cost - the value of the next-best option given up.
- Supply and demand: demand slopes downward, supply slopes upward, and equilibrium is where they meet. A shortage pushes price up; a surplus pushes it down.
- Shifts versus movements: a price change moves you along a curve; changes in income, tastes, technology, or input costs shift the whole curve.
- Macro indicators: GDP, unemployment, and inflation.
- Policy: fiscal policy is government spending and taxes; monetary policy is the Federal Reserve adjusting interest rates and the money supply.
- Trade: specialization and comparative advantage raise total output.
Traps
- Calling any price change a "shift in demand."
- Mixing fiscal and monetary policy.
- Assuming inflation harms everyone - borrowers and owners of goods may gain while lenders and savers lose.
Worked example
A bakery sells 100 loaves at $4 each. To sell 120, it must lower the price to $3.50. Has demand shifted? No. Only the price changed, so this is a change in quantity demanded - a movement along the demand curve. Demand would shift only if something besides price changed, such as a report that bread lowers cholesterol.