Fundamental economic concepts

Where the answer comes from: the supply line S and the demand line D cross at point E. Reading left to the price axis gives $4. The table agrees: at $4, quantity demanded = 600 and quantity supplied = 600.

Step by step:

1. Equilibrium means buyers want to buy exactly as much as sellers want to sell.
2. In the table, look for the row where the two quantity columns are equal. Only the $4 row matches (600 = 600).
3. At $3, buyers want 750 but sellers offer only 450 (a shortage). At $5, sellers offer 750 but buyers want only 450 (a surplus). Neither is equilibrium.
4. 600 is the equilibrium quantity, not the price—read the axis labels carefully.

Answer: $4 per pint.

Tip: on any supply-and-demand graph, find the crossing point first, then read across to the price axis and down to the quantity axis.

Definition: the opportunity cost of a choice is the value of the next-best alternative given up.

Step by step:

1. Maya chose to work.
2. Her options were limited because time is scarce—she has only one Saturday.
3. Her second choice (next-best alternative) was the concert. That is what she truly gave up.
4. Helping her brother was her third choice. She also gave it up, but opportunity cost counts only the next-best option, not every option.
5. The $90 is what she gains from working, not what she gives up.

Answer: going to the concert with her friends.

Tip: to find opportunity cost on the GED, ask: "If this person had not made this choice, what would they have done instead?" That single option is the opportunity cost.

Data: the $5 row of the table shows quantity demanded = 450 and quantity supplied = 750.

Step by step:

1. Sellers bring more strawberries (750) than buyers want (450).
2. When quantity supplied is greater than quantity demanded, the extra goods are a surplus.
3. Size of the surplus: 750 - 450 = 300 pints.
4. A surplus pushes prices down: farmers with leftover berries will lower prices to sell them, moving the market toward the $4 equilibrium.

Answer: There will be a surplus of 300 pints.

Why not a shortage? A shortage happens when the price is below equilibrium (for example, $3), so buyers want more than sellers offer.

Tip: price above equilibrium → surplus (too much supplied). Price below equilibrium → shortage (too much demanded).

Where the answer comes from: the lines D and S cross at point E. Reading straight left to the price axis gives $20. The table agrees: at $20, kayak-hours demanded = 60 and kayak-hours supplied = 60.

Step by step:

1. Equilibrium is the price where the amount buyers want equals the amount sellers offer.
2. Scan the table: $10 (100 vs. 20), $15 (80 vs. 40), $20 (60 vs. 60), $25 (40 vs. 80). Only $20 has equal quantities.
3. 60 is the equilibrium quantity, not the price.

Answer: $20 per hour.

Check: at $15 renters want more than businesses offer (shortage), and at $25 businesses offer more than renters want (surplus). Equilibrium must sit between them—$20 does.

Tip: read the crossing point two ways: across to the price axis and down to the quantity axis. Keep the two numbers separate.

Data: the $25 row shows 40 kayak-hours demanded and 80 kayak-hours supplied.

Step by step:

1. Businesses offer 80 kayak-hours, but renters want only 40.
2. When quantity supplied is greater than quantity demanded, the extra is a surplus: kayaks sit unused on the dock.
3. Size: 80 − 40 = 40 kayak-hours.
4. Businesses with idle kayaks will tend to cut prices, moving the market back toward the $20 equilibrium.

Answer: a surplus of 40 kayak-hours.

Check: $25 is above the equilibrium price of $20. A price above equilibrium always leads to a surplus.

Tip: remember the pattern: price too high → surplus (too much supplied); price too low → shortage (too much demanded). Then calculate the size as the difference between the two columns.

Evidence: paragraph 1 says Rosa "worked as a cook in a hospital kitchen, earning $38,000 a year," and she "also had an offer to manage a restaurant for $34,000 a year." The stem says keeping the hospital job was her next-best choice.

Step by step:

1. Rosa chose the food truck.
2. Her alternatives were the hospital job ($38,000) and the restaurant job ($34,000).
3. Opportunity cost counts only the next-best alternative: the hospital job and its $38,000 salary.
4. Eliminate: the restaurant job was her third choice; adding both salaries ($72,000) counts more than one alternative; the cost of the truck is a money expense of her choice, not the alternative she gave up.

Answer: the $38,000 a year she would have earned at the hospital.

Check: ask, "If Rosa had not opened the truck, what would she have done?" She would have kept the hospital job.

Tip: opportunity cost is never the sum of all options. Pick one: the best thing you gave up.

Evidence: paragraph 1: in Alvoria, "A national planning office decides how many tractors, shoes, and loaves of bread will be made each year. The government owns nearly all factories and farms and sets the prices of most goods."

Step by step:

1. A command economy is one where the central government makes the key decisions: what to produce, how much, and at what price.
2. Alvoria has a planning office, government ownership, and government-set prices—all signs of command.
3. Eliminate: Bretmark is a market economy (private businesses, prices from supply and demand). Corvel is a traditional economy (custom and family trades). Delmar is a mixed economy (mostly private businesses plus government programs).

Answer: Alvoria.

Check: the words planning office, government owns, and sets the prices are classic command-economy signals.

Tip: identify the decision-maker. Government planners → command; buyers and sellers → market; custom and tradition → traditional; a blend of market and government → mixed.

Data: Northland: 6 tons of wheat or 3 bolts of cloth per worker per day. Southland: 2 tons of wheat or 2 bolts of cloth.

Step by step:

1. Opportunity cost of 1 bolt of cloth in Northland: 6 \div 3 = 2 tons of wheat given up.
2. Opportunity cost of 1 bolt of cloth in Southland: 2 \div 2 = 1 ton of wheat given up.
3. Southland gives up less wheat (1 ton vs. 2 tons) to make cloth, so Southland has the comparative advantage in cloth.
4. Northland makes more cloth per worker (3 vs. 2). That is an absolute advantage, which is a different idea—it does not decide comparative advantage.

Answer: Southland, because it gives up only 1 ton of wheat for each bolt of cloth.

Tip: absolute advantage = who makes more. Comparative advantage = who gives up less. GED distractors often swap these two ideas.

Evidence: paragraph 1 says the council chose between "repairing the leaking roof of the public library or building a new park." Paragraph 2 says the council "voted to build the park" and "the library roof repair was postponed."

Step by step:

1. Riverbend faces scarcity: $2 million cannot pay for both $2 million projects.
2. The council chose the park.
3. The next-best alternative it gave up was the library roof repair. That is the opportunity cost.
4. The $2 million is the money price of the park, not the alternative given up. The bag fee and the rebate are separate policies in paragraphs 3–4.

The council member's words in paragraph 2 sum up opportunity cost: "Every dollar we spend on one project is a dollar we cannot spend on another."

Answer: repairing the library roof this year.

Tip: opportunity cost is always an alternative—something you could have done instead—not the price tag of what you chose.

Evidence: brief (1): "A long drought … has damaged orchards. Growers expect to harvest far fewer avocados this season."

Step by step:

1. The drought affects growers—the sellers. So it shifts supply, not demand.
2. Fewer avocados can be offered at every price, so supply decreases (the supply curve shifts left).
3. With demand unchanged, a smaller supply creates a shortage at the old price. Buyers compete for the scarce avocados, so the price rises and the quantity sold falls.
4. Eliminate: price falling with less supply reverses the result; "demand decreases" names the wrong curve; "no change" ignores the shift.

Answer: Supply decreases, so the price rises and fewer avocados are sold.

Check: think of any bad harvest—orange freezes or coffee frosts make those products more expensive at the store.

Tip: first ask who is affected (buyers → demand; sellers/producers → supply), then which direction. Supply down → price up, quantity down.

Evidence: paragraph 4: the city "gives a $300 yearly grant to any food truck that uses only compostable plates and forks. It also fines vendors $100 for each bag of trash left behind."

Step by step:

1. An incentive is a reward or penalty meant to change behavior.
2. The $300 grant rewards trucks for using compostable plates—a positive incentive.
3. The $100 fine punishes leaving trash—a negative incentive, not positive.
4. The lot's limited hours (paragraph 3) show scarcity of time; they are not designed to change behavior.
5. Rosa's hospital salary is part of her opportunity cost, not an incentive created by anyone.

Answer: the $300 grant for food trucks that use compostable plates and forks.

Check: ask, "Is someone being rewarded for doing something?" Only the grant fits.

Tip: positive incentives pull (grants, rebates, bonuses, discounts); negative incentives push (fines, fees, taxes, penalties). Both aim at the same goal—here, less waste in the park.

Data: Dana makes 12 muffins or 4 cakes per hour; Luis makes 6 muffins or 3 cakes per hour.

Step by step:

1. Absolute advantage = the producer who can make more of a good with the same time or resources.
2. Muffins: Dana 12 vs. Luis 6 → Dana has the absolute advantage.
3. Cakes: Dana 4 vs. Luis 3 → Dana has the absolute advantage again.
4. So Dana has the absolute advantage in both muffins and cakes.
5. Eliminate: Luis does not make more of either item; and "each has one" confuses absolute advantage with comparative advantage (which compares opportunity costs).

Answer: Dana has the absolute advantage in both muffins and cakes.

Check: compare row by row, column by column: Dana's number is larger in both columns.

Tip: absolute advantage = who makes more. Comparative advantage = who gives up less. A worker can have the absolute advantage in everything but the comparative advantage in only one thing.

Data: original table rows—$4: demanded 600, supplied 600; $5: demanded 450, supplied 750.

Step by step:

1. New demand = old demand + 300 at every price:
   • $4: 600 + 300 = 900 demanded vs. 600 supplied → shortage.
   • $5: 450 + 300 = 750 demanded vs. 750 supplied → equal!
   • $6: 300 + 300 = 600 demanded vs. 900 supplied → surplus.
2. The new equilibrium is where new demand = supply: $5 and 750 pints.
3. On a graph, the demand curve shifts right, sliding up along the supply curve. Both price and quantity rise.

Why the others are wrong: $4 and 900 ignores that a shortage pushes the price up; $4 and 600 is the old equilibrium; $5 and 450 uses the old demand at $5.

Answer: $5 per pint and 750 pints per day.

Tip: demand increases → price ↑ and quantity ↑. Supply increases → price ↓ and quantity ↑. Memorize these four shift results; the GED uses them often.

Data: demand stays the same; new supply = old supply + 40.

Step by step:

1. Build the new supply column:
   • $10: 20 + 40 = 60 supplied vs. 100 demanded → shortage.
   • $15: 40 + 40 = 80 supplied vs. 80 demanded → equal!
   • $20: 60 + 40 = 100 supplied vs. 60 demanded → surplus.
2. The new equilibrium is $15 and 80 kayak-hours.
3. On the graph, the supply line shifts right. Price falls and quantity rises.

Why the others are wrong: $20 and 100 ignores that a surplus pushes the price down; $20 and 60 is the old equilibrium; $15 and 40 uses the old supply at $15.

Answer: $15 per hour and 80 kayak-hours.

Check: an increase in supply should lower the price and raise the quantity—$20 → $15 and 60 → 80 fits.

Tip: memorize the four shift results: demand ↑ → P↑ Q↑; demand ↓ → P↓ Q↓; supply ↑ → P↓ Q↑; supply ↓ → P↑ Q↓.

Data: Dana: 12 muffins or 4 cakes per hour → 1 cake costs her 12 ÷ 4 = 3 muffins. Luis: 6 muffins or 3 cakes per hour → 1 cake costs him 6 ÷ 3 = 2 muffins.

Step by step:

1. Luis sells cakes. Making a cake costs him 2 muffins, so he gains only if he gets more than 2 muffins per cake.
2. Dana buys cakes. Making a cake herself costs 3 muffins, so she gains only if she pays less than 3 muffins per cake.
3. A trade price between 2 and 3 muffins per cake helps both. Only 2.5 fits.
4. Check the others:
   • 1 cake for 2 muffins: Luis gets exactly his own cost → gains nothing.
   • 1 cake for 3 muffins: Dana pays exactly her own cost → gains nothing.
   • 1 cake for 4 muffins: Dana pays more than making it herself → loses.

Answer: 1 cake for 2.5 muffins.

Check: Luis gets 0.5 muffin more than his cost; Dana pays 0.5 muffin less than her cost. Both gain.

Tip: mutually beneficial terms of trade always fall strictly between the two producers' opportunity costs.

Data: the board ranked the solar farm 1st, the community garden 2nd, and the parking lot 3rd.

Step by step:

1. The choice is the solar farm.
2. The next-best alternative—the one the board would have picked otherwise—is rank 2: the community garden.
3. So the opportunity cost is the garden and the fresh food it would have provided for 200 families.
4. Eliminate:
   • $60,000 in rent is the benefit of the choice, not the cost.
   • The parking lot has a dollar value, which makes it tempting, but it ranked 3rd—it is not the next-best alternative.
   • Both the garden and the parking lot adds up every option given up; opportunity cost counts only the next-best one.

Answer: the community garden that would have fed 200 families.

Check: opportunity cost does not have to be measured in dollars. A non-money benefit (fresh food) can be the opportunity cost.

Tip: follow the decision-maker's ranking, not the option with the biggest number. The second-ranked choice is the opportunity cost.

Data: Luis can make 6 muffins or 3 cakes in one hour.

Step by step:

1. If Luis spends the hour on muffins, he makes 6 muffins and gives up 3 cakes.
2. So 6 muffins cost 3 cakes.
3. For one muffin: 3 ÷ 6 = 0.5 cake.

Answer: 0.5 cake (half a cake).

Why the others are tempting:

• 2 cakes inverts the ratio (6 ÷ 3). That is actually Luis's cost of 1 cake, measured in muffins.
• 3 cakes is the total cakes given up for 6 muffins, not for 1.
• 1/3 cake is Dana's cost of 1 muffin (4 ÷ 12), not Luis's.

Check: Dana's cost of a muffin is 1/3 cake, and Luis's is 1/2 cake. Dana gives up less to make muffins, so Dana has the comparative advantage in muffins.

Tip: opportunity cost of 1 unit of X = (amount of Y given up) ÷ (amount of X gained). Put the good you give up on top.

Data: the equilibrium price is $20 (60 demanded = 60 supplied). The ceiling is $25.

Step by step:

1. A price ceiling is a legal maximum price. Prices may be at or below $25.
2. The market price is already $20, which is below the ceiling. The rule does not force any business to change its price.
3. So the market stays at $20 and 60 kayak-hours. The ceiling has no effect.
4. Eliminate:
   • "A shortage of 40" — a shortage happens only when a ceiling is set below equilibrium (for example, at $15).
   • "A surplus of 40" — the table shows a surplus at $25, but only if the price were actually forced up to $25; a ceiling does not raise prices.
   • "The price rises to $25" — a ceiling is a limit, not a target.

Answer: Nothing changes; the price stays at $20 because the ceiling is above equilibrium.

Check: compare a ceiling of $15, which is below equilibrium: then 80 would be demanded but only 40 supplied—a shortage of 40. Position relative to equilibrium is what matters.

Tip: a ceiling matters only below equilibrium; a floor matters only above equilibrium. Always locate equilibrium first.

Data: Northland gives up 2 tons of wheat to make 1 bolt of cloth (6 \div 3). Southland gives up 1 ton of wheat to make 1 bolt of cloth (2 \div 2).

Step by step:

1. Northland buys cloth. At home, cloth costs it 2 tons of wheat per bolt. Northland gains only if it pays less than 2 tons per bolt.
2. Southland sells cloth. At home, 1 bolt of cloth "costs" it 1 ton of wheat. Southland gains only if it receives more than 1 ton per bolt.
3. So a good price is between 1 and 2 tons of wheat per bolt. Only 1.5 tons fits.
4. Check the others:
   • 0.5 ton per bolt: Southland would get less than its own cost of 1 ton → loses.
   • 2 tons per bolt: Northland pays exactly what cloth costs it at home → gains nothing.
   • 3 tons per bolt: Northland would pay more than its cost of 2 tons → loses.

Answer: 1 bolt of cloth for 1.5 tons of wheat.

Tip: trade benefits both sides when each specializes in its comparative-advantage good and the trading price lies between the two countries' opportunity costs.

Data: Dana: 12 muffins or 4 cakes per hour. Luis: 6 muffins or 3 cakes per hour.

Step by step:

1. Dana's opportunity cost of 1 cake: 12 ÷ 4 = 3 muffins.
2. Luis's opportunity cost of 1 cake: 6 ÷ 3 = 2 muffins.
3. Luis gives up fewer muffins to make a cake (2 < 3), so Luis has the comparative advantage in cakes—even though Dana makes more cakes per hour.
4. Eliminate:
   • "Dana, because she makes 4 cakes an hour" — that is absolute advantage.
   • "Dana, because she gives up 3 muffins" — a higher opportunity cost is a disadvantage.
   • "Neither, because Dana is faster at both" — even when one worker is better at everything, the other still has a comparative advantage in something.

Answer: Luis, because he gives up only 2 muffins for each cake.

Check: if comparative advantage is Luis's in cakes, it must be Dana's in muffins. Dana's cost per muffin (4 ÷ 12 = 1/3 cake) is lower than Luis's (3 ÷ 6 = 1/2 cake). ✔

Tip: the slower worker can still have a comparative advantage. That is why specialization and trade can help everyone.

Evidence: paragraph 4: in Delmar, "Most stores, farms, and factories are privately owned and compete for customers. The government also runs the public schools and the national health-insurance system, sets a minimum wage, and taxes income."

Step by step:

1. A mixed economy combines market features (private ownership, competition, supply and demand) with command features (government programs, regulation, taxes).
2. Delmar has both: private, competing businesses and government schools, health insurance, a minimum wage, and income taxes.
3. Eliminate:
   • Bretmark has a government that "enforces contracts but does little else"—very close to a pure market economy. Some government role does not make an economy mixed in the GED sense.
   • Alvoria is a command economy; government owning everything is not a mix.
   • Corvel is a traditional economy based on custom.

Answer: Delmar, because it combines privately owned, competing businesses with government-run programs and rules.

Check: the U.S. fits the same pattern: private businesses plus public schools, Social Security, Medicare, and a federal minimum wage.

Tip: in classification items, find the description with features of both market and command systems. A single minor government role (like enforcing contracts) is not enough.

Evidence: the passage says the PPC shows what the island can make "when it uses all of its resources fully and efficiently." Point G (30 boats, 80 tons) lies outside the curve.

Step by step:

1. To reach a point outside the curve, the whole curve must shift outward. That requires more resources (land, labor, capital) or better technology.
2. A group of skilled workers moving to the island adds labor, increasing what the island can make of both goods. The curve shifts out, and G can become attainable.
3. Eliminate:
   • "Choose to build more boats" — that is a movement along the curve (for example, B to D), not a shift. At 30 boats, the island still gets only 40 tons of food.
   • "Put some workers out of work" — moves production inside the curve (like point F), making things worse.
   • "Move from point A to point E" — another movement along the curve.

Answer: A group of skilled workers moves to the island and joins the workforce.

Check: after the change, the island would need 40 more tons of food at 30 boats than point D provides. Only an increase in resources or technology can do that.

Tip: movement along the PPC = a choice (trade-off); a shift of the PPC = growth or loss of resources or technology.

Evidence: brief (1): growers "expect to harvest far fewer avocados" → supply decreases. Brief (2): "more shoppers are asking for them" → demand increases.

Step by step:

1. Supply decrease alone: price ↑, quantity ↓.
2. Demand increase alone: price ↑, quantity ↑.
3. Price: both shifts push price up, so the price definitely rises.
4. Quantity: one shift pushes quantity down and the other pushes it up. Without knowing which shift is larger, the change in quantity is uncertain.
5. Eliminate:
   • "Price falls" — neither shift lowers the price.
   • "Price rises and quantity definitely rises" — ignores the supply decrease pulling quantity down.
   • "Price and quantity both stay the same" — the effects on price do not cancel; they add together.

Answer: The price rises, but the change in quantity sold cannot be determined without more information.

Check: this "one certain, one uncertain" result happens whenever two shifts occur at once.

Tip: on two-shift problems, make a small table (P and Q for each shift). If the arrows agree, the result is certain; if they disagree, the result is "cannot be determined."