What you'll learn
In plain words: Microeconomics is about the money choices of one family, one worker, or one business.
Microeconomics studies the choices of individual households, workers, and businesses. In this lesson you will learn:
- how a business thinks about costs, revenue, and profit;
- how competition differs from monopoly;
- what elasticity means;
- how labor markets set wages; and
- the four factors of production.
How the GED tests this: Micro questions are usually built around a small table or graph:
- a business's cost table, where you calculate revenue, profit, or the break-even point;
- a short description of several businesses, which you sort by market structure;
- a table of price and quantity changes, where you decide whether demand is elastic or inelastic;
- a bar graph of wages or earnings, where you compare values and avoid conclusions that go too far.
Many of these items let you use the on-screen calculator. You will need percent change, subtraction, and division — nothing harder.
Key terms
- factors of production — the resources used to make goods and services: land, labor, capital, entrepreneurship.
- land — natural resources (farmland, oil, water, timber).
- labor — human work (a cook's hours in a kitchen).
- capital — human-made tools and equipment used in production (ovens, trucks, computers). Not money.
- entrepreneur — a person who takes the risk of starting and running a business.
- fixed cost — a cost that does not change with output (monthly rent).
- variable cost — a cost that rises with output (flour for each loaf).
- total cost — fixed cost + variable cost.
- marginal cost — the extra cost of making one more unit.
- total revenue — price × quantity sold.
- profit — total revenue − total cost (a negative profit is a loss).
- break-even point — the output where total revenue = total cost (profit = $0).
- perfect competition — many sellers, identical products, no control over price (wheat farmers).
- monopolistic competition — many sellers, slightly different products (restaurants, hair salons).
- oligopoly — a few large sellers who watch each other (airlines, cell carriers).
- monopoly — one seller, no close substitutes (a local water utility).
- barrier to entry — anything that makes it hard for new firms to enter a market (huge start-up costs, patents).
- elasticity of demand — how strongly quantity demanded responds to a price change.
- elastic — quantity changes by a bigger percent than price (luxuries, goods with many substitutes).
- inelastic — quantity changes by a smaller percent than price (necessities like gasoline or insulin).
- wage — the price of labor.
- human capital — the skills and knowledge a worker gains through education and training.
Factors of production, costs, revenue, and profit
In plain words: A business makes a profit when the money coming in is bigger than all its costs.
Every good or service uses the four factors of production — the resources needed to make things. Picture a pizza shop:
- land — the lot it sits on and the water it uses;
- labor — the cooks and drivers;
- capital — the ovens and delivery cars;
- entrepreneurship — the owner who risked savings to open it.
Costs. Businesses split costs into two groups. Fixed costs stay the same no matter how much you make. Variable costs go up when you make more.
| Fixed costs (stay the same) | Variable costs (rise with output) |
|---|---|
| Rent, insurance, loan payments, salaried managers | Ingredients, packaging, hourly wages, shipping |
Total cost = fixed cost + variable cost.
Revenue and profit.
- Total revenue is all the money from sales: price × quantity.
- Profit is what is left after paying all costs: total revenue − total cost.
Example: A T-shirt printer pays $900 per month in rent. She pays $4 per shirt in materials. She sells each shirt for $10. Say she sells 200 shirts:
- revenue = $10 × 200 = $2,000;
- total cost = $900 + $4 × 200 = $1,700;
- profit = $2,000 − $1,700 = $300.
Break-even. The break-even point is where she earns just enough to cover all costs. Each shirt brings in $10 − $4 = $6 above its own cost. To cover $900 in fixed costs, she needs $900 ÷ $6 = 150 shirts. Below 150 she loses money. Above 150 she earns a profit.
Marginal thinking. "Marginal" means "one more." Should the business make one more unit? It compares two things:
- marginal revenue — the extra money from selling one more;
- marginal cost — the extra cost of making one more.
If marginal revenue is greater, making more raises profit. Example: One more shirt sells for $10 and costs $4 to make. Printing it adds $6 to profit.
Competition and monopoly
In plain words: The more sellers there are, the less power any one of them has over price.
Markets differ in two ways: how many firms compete, and how much power each firm has over price.
| Structure | Number of sellers | Product | Control over price | Entry | Example |
|---|---|---|---|---|---|
| Perfect competition | Very many | Identical | None (price takers) | Easy | Corn, wheat |
| Monopolistic competition | Many | Slightly different | A little | Easy | Coffee shops, salons |
| Oligopoly | A few large | Same or different | Significant; firms react to each other | Hard | Airlines, cell service |
| Monopoly | One | No close substitute | Great (price maker) | Blocked | Local water utility |
Why competition matters. Imagine two gas stations on the same corner. If one charges much more, drivers just go across the street. In a competitive market, a firm that charges too much loses customers to rivals. So prices stay close to cost, and firms try to improve quality. A monopoly can charge higher prices and produce less. Buyers have nowhere else to go.
How governments respond:
- Antitrust laws are laws against unfair monopolies. They started with the Sherman Antitrust Act (1890). They make it illegal to form monopolies through unfair practices. They also ban fixing prices with rivals.
- Regulation of natural monopolies. Sometimes one firm can serve a whole area more cheaply than several firms could. Think of water pipes or power lines. It would be wasteful to dig up a street for three sets of pipes. So governments often allow a single firm. But a public commission must approve its prices.
- Patents are a legal monopoly the government grants on purpose, for about 20 years. They reward invention.
Elasticity basics
In plain words: Elasticity tells you how much buyers react when a price changes.
The law of demand says people buy less when prices rise. Elasticity asks how much less.
- Elastic: % change in quantity > % change in price. Buyers are very sensitive. They cut back a lot.
- Inelastic: % change in quantity < % change in price. Buyers keep buying.
Example: Prices rise 10%. Movie-ticket sales fall 25% → elastic. Electricity use falls 2% → inelastic. You can skip a movie, but you still need your lights.
What makes demand inelastic?
- Few substitutes (gasoline in the short run, prescription medicine).
- Necessities rather than luxuries.
- Small share of the budget (salt, matches).
- Short time to adjust. When gas prices jump, people can't buy a new car overnight.
Why businesses and governments care. Revenue = price × quantity.
- If demand is inelastic, raising the price raises revenue. Few buyers leave.
- If demand is elastic, raising the price lowers revenue. Many buyers leave.
This is why governments often tax goods with inelastic demand, such as cigarettes and gasoline. People keep buying them, so the tax brings in steady revenue.
Labor markets
In plain words: Your wage is the price an employer pays for your work. It follows supply and demand.
A labor market works like any other market:
- Workers supply labor.
- Employers demand labor.
- The wage is the price.
Wages are higher when labor demand is high or labor supply is small. Surgeons earn more than cashiers partly for two reasons. Few people have surgical skills (small supply). And those skills are highly valued (high demand).
Human capital is the education, training, and experience a worker has. It raises a worker's productivity and usually raises pay. Data from the Bureau of Labor Statistics (BLS) show median weekly earnings in 2023:
- $899 for high school graduates;
- $1,493 for bachelor's degree holders.
Shifts in labor demand come from two main sources. One is demand for the product (more online shopping → more warehouse workers). The other is technology (automation can replace some jobs and create others).
Shifts in labor supply come from population, immigration, and changes in who chooses to work.
Minimum wage is a price floor in the labor market. Labor unions bargain as a group (collectively) for higher wages and better conditions.
Example: A new factory opens in a small town and needs 500 workers. Demand for labor increases, so local wages tend to rise.
Formulas to know
\text{Total revenue} = \text{price} \times \text{quantity} \text{Profit} = \text{total revenue} - \text{total cost}, \qquad \text{Total cost} = \text{fixed cost} + \text{variable cost} \text{Break-even quantity} = \dfrac{\text{fixed cost}}{\text{price} - \text{variable cost per unit}} \text{percent change} = \dfrac{\text{new} - \text{old}}{\text{old}} \times 100The Social Studies test has no formula sheet. Questions often define revenue and profit for you, but you should know these by heart.
Example 1: Profit from a cost table
Source: A food truck has fixed costs of $2,000 per month. Each taco costs $1.50 to make and sells for $4.
Question: What is the profit if the truck sells 1,000 tacos in a month?
Think-aloud:
- Revenue = $4 × 1,000 = $4,000.
- Variable cost = $1.50 × 1,000 = $1,500. Total cost = $2,000 + $1,500 = $3,500.
- Profit = $4,000 − $3,500 = $500.
- Traps: $4,000 is revenue; $2,500 forgets the fixed cost ($4,000 − $1,500).
Answer: $500. (Break-even would be $2,000 ÷ $2.50 = 800 tacos.)
Example 2: Classifying a market
Source: "Two companies make nearly all of the country's large passenger jets. Building a jet factory costs billions of dollars. When one company cuts prices on a model, the other quickly responds."
Question: Which market structure is described?
Think-aloud:
- Number of sellers: two → a few, not one and not many.
- High barrier: billions to enter.
- Firms react to each other's prices—a hallmark of oligopoly.
- Not monopoly (there are two). Not monopolistic competition (that needs many sellers and easy entry).
Answer: oligopoly.
Example 3: Elastic or inelastic?
Source: When the price of insulin rose 15%, purchases fell 1%. When the price of a brand of soda rose 15%, its sales fell 40%.
Question: Which statement is correct?
Think-aloud:
- Insulin: 1% < 15% → inelastic. It is a medical necessity with no easy substitute.
- Soda brand: 40% > 15% → elastic. Shoppers can switch to another brand.
- Revenue check: insulin seller's revenue rises (1.15 \times 0.99 \approx 1.14); soda maker's falls (1.15 \times 0.60 = 0.69).
Answer: demand for insulin is inelastic and demand for the soda brand is elastic.
Example 4: Reading a wage graph
Source: A bar graph shows median hourly wages: home health aides $16, electricians $30, registered nurses $41.
Question: By what percent is the median wage for electricians higher than for home health aides?
Think-aloud:
- Difference: $30 − $16 = $14.
- Base is the value after "than": home health aides, $16.
- 14 \div 16 = 0.875 → 87.5% higher.
- Trap: 14 \div 30 \approx 47\% uses the wrong base. Another trap: concluding that "every electrician earns more than every aide" from medians.
Answer: about 88% higher.
Common traps
- Revenue vs. profit. Wrong: "The bakery made $3,000, so its profit is $3,000." Right: profit = revenue − all costs.
- Forgetting fixed costs. Wrong: profit = revenue − variable cost. Right: subtract fixed cost too.
- Capital means money. Wrong: "Her savings are capital as a factor of production." Right: capital is tools and equipment; money buys capital.
- Elastic vs. inelastic swapped. Wrong: "Gas sales barely changed, so demand is elastic." Right: a small response = inelastic.
- Cause vs. effect in monopoly. Wrong: "Government price regulation creates the water monopoly." Right: the high barrier to entry creates the monopoly; regulation responds to it.
- Median = everyone. Wrong: "All bachelor's holders earn $1,493." Right: that is the middle value; half earn more, half earn less.
GED strategy for microeconomics
- Underline the numbers you need (price, fixed cost, variable cost per unit) before calculating.
- Write each step. Most wrong answers on profit questions are the result of skipping one step.
- Check with the table. If a table is given, confirm your answer appears in it (e.g., the row where revenue = cost).
- Sort markets by two clues: number of sellers and product sameness.
- For elasticity, compare two percentages—quantity change vs. price change.
- On graphs, watch for overreach. Choose conclusions that describe the data, not ones that claim a single cause or speak about "every" person.
- Use the calculator for division and percent change, but estimate first so you can catch keying errors.
Check yourself
Main Street Bakery's Costs
Main Street Bakery makes one product: loaves of bread, which it sells for $5 each. The owner pays $1,200 per month for rent and an equipment loan, no matter how many loaves she bakes. Ingredients and packaging cost $2 per loaf.
| Loaves baked per month | Fixed cost | Variable cost | Total cost |
|---|---|---|---|
| 0 | $1,200 | $0 | $1,200 |
| 200 | $1,200 | $400 | $1,600 |
| 400 | $1,200 | $800 | $2,000 |
| 600 | $1,200 | $1,200 | $2,400 |
| 800 | $1,200 | $1,600 | $2,800 |
Total revenue = price × quantity sold. Profit = total revenue − total cost. Assume every loaf baked is sold.
Which of the bakery's costs is a fixed cost?
Hint
A fixed cost stays the same whether the bakery makes 0 loaves or 800 loaves.
Step-by-step solution
Evidence: the passage says the owner pays "$1,200 per month for rent and an equipment loan, no matter how many loaves she bakes." The table's Fixed cost column is $1,200 in every row, from 0 loaves to 800 loaves.
Step by step:
- A fixed cost does not change when output changes.
- Rent must be paid even if the bakery bakes nothing—so it is fixed.
- Flour, paper bags, and butter are used up with each loaf or batch. The more bread she bakes, the more she spends on them. Those are variable costs (the passage's "$2 per loaf" for ingredients and packaging).
Answer: the monthly rent on the shop.
Why it matters: a business must cover its fixed costs before it can earn any profit. That is why the bakery loses $1,200 if it bakes nothing.
Tip: ask "Would I still pay this if I closed for a month but kept the business?" If yes, it is fixed. If it goes up and down with production, it is variable.
Check yourself
Main Street Bakery's Costs
Main Street Bakery makes one product: loaves of bread, which it sells for $5 each. The owner pays $1,200 per month for rent and an equipment loan, no matter how many loaves she bakes. Ingredients and packaging cost $2 per loaf.
| Loaves baked per month | Fixed cost | Variable cost | Total cost |
|---|---|---|---|
| 0 | $1,200 | $0 | $1,200 |
| 200 | $1,200 | $400 | $1,600 |
| 400 | $1,200 | $800 | $2,000 |
| 600 | $1,200 | $1,200 | $2,400 |
| 800 | $1,200 | $1,600 | $2,800 |
Total revenue = price × quantity sold. Profit = total revenue − total cost. Assume every loaf baked is sold.
If the bakery bakes and sells 600 loaves in a month, what is its profit?
Hint
First find total revenue (price × quantity). Then subtract total cost from the table.
Step-by-step solution
Data: price = $5 per loaf; the 600-loaf row shows total cost = $2,400.
Step by step:
- Total revenue = price × quantity = $5 × 600 = $3,000.
- Profit = total revenue − total cost = $3,000 − $2,400 = $600.
Check with per-loaf thinking: each loaf brings in $5 and costs $2 in ingredients, leaving $3 toward fixed costs. 600 loaves × $3 = $1,800. Subtract the $1,200 fixed cost: $1,800 − $1,200 = $600. ✔
Why the others are wrong: $3,000 is revenue, not profit. $1,800 forgets the fixed cost. $1,200 is a cost (the variable cost, and also the fixed cost, at 600 loaves), not profit.
Answer: $600
Tip: revenue is what comes in; profit is what is left after all costs—fixed and variable.
Summary
- The four factors of production are land, labor, capital (tools, not money), and entrepreneurship.
- Profit = revenue − total cost, and total cost = fixed + variable. Break-even = fixed cost ÷ (price − variable cost per unit).
- Market structures range from perfect competition (many sellers, identical goods) to monopoly (one seller, high barriers).
- Elastic demand reacts strongly to price; inelastic demand barely changes. Elasticity decides whether a price increase raises or lowers revenue.
- In labor markets, wages depend on the supply of and demand for skills; more human capital usually means higher pay.
- On the GED, calculate step by step and avoid conclusions the data do not support.