GED Social Studies Practice Test: Introduction to Economics

Economics is the science (or, as many would call it, the social science) of analyzing the choices that people (consumers) make in order to satisfy needs and wants. Economics is not a true science, like biology or physics, because many of its components cannot be tested under controlled circumstances.

You can’t go through your day without encountering economics. Your household is an economic unit. What coffee to buy? If lamb is too expensive, should you buy beef instead? The study of households, business organizations (another economic decision you make: you go to work in order to earn money), and individual markets (let’s say, the movie theater industry) is called microeconomics. The study of entire economies (say, Brazil or the United States), or groups of countries, is called macroeconomics.

Who’s Who?
You had your first cup of coffee this morning, and on your way to work you bought a pack of gum. Later on, you’ll shop for groceries or maybe even go look at new cars. In other words, you are a “user” — a consumer. The company that produced your coffee, made your chewing gum, and manufactures cars are producers. Can an economic actor be a consumer and a producer at once? Sure. Look at an automobile manufacturer; it has to buy thousands of different components from different companies and then assembles cars that are sold to the public. The coffee company buys raw materials (coffee beans) and then roasts them and packages them, and the finished product winds up on the shelves of the grocery store.

What is What?
A good is a physical object — a vacuum cleaner, a minivan, a stick of gum, a box of peanut brittle — that is real and may be purchased. Services are actions or activities that are performed — not for free, of course (that’s charity), but in exchange for money. The care you receive from your doctor is a service. The mechanic who fixes your car performs a service. Accounting, law, laundry, consulting, and healthcare are all services. And the exchange of goods and services is called the market.

Where Does “Stuff” Come From?
Wouldn’t it be nice if you could wave a wand and the thing you want or need would magically appear? Great idea, but it doesn’t work like that. Goods and services come from resources — something that’s used to produce a good or service. Let’s look at three types:

  1. Natural Resources – the coffee beans in your morning cup of java are found in the Earth (or maybe the atmosphere). The ingredients of the gum you chew (sugar, for example) comes from a plant. The steel that makes up the exterior of your car starts as iron ore mined from the Earth.
  2. Human Resources – things don’t just make themselves; human effort (human resources) comes in two varieties: physical (the elbow grease needed to make a car) and intellectual (the thought your accountant puts into preparing your tax return).
  3. Capital Resources – Where is an automobile made? In a factory. Where does a law firm house its attorneys? In an office. The buildings, structures, tools (for example, a dump truck), an axe, or a computer is a capital good.

Gimme the Green
Trading one good for another is known as barter. I give you chickens that I raise and, in return, you give me radios that you’ve made. But what if I think my chickens are worth more than the radios you’re offering me. The radio guy thinks his goods are more valuable than my chickens. Or, what if I don’t need radios; I need firewood, but no one around is offering any. These are some of the problems associated with barter.

So, instead, most societies developed a standard means of exchange: MONEY. It’s an item (usually coins or paper currency) that is readily accepted in return for goods and services. When you think of money you usually think of dollars and cents. With money, I can buy radios and the other guy can buy my chickens. It’s standardized and it has worth, so everyone is, so to speak, on the same page. A dollar in North Carolina is worth the same amount in North Dakota. Money can also be saved up — it has value. If I don’t sell my eggs for money, what I’ll wind up with, after a certain point, is a bunch of rotten eggs. If I sell my eggs (at a price I determine, and others will buy them at that price), I get money in return, and I can then spend that money or save it.

Other Factors
Entrepreneurs are people or organizations that start new businesses or introduce something new. History shows us that a single person (or small group of people) can create whole industries: think of Steve Jobs and Bill Gates; or Henry Ford. These men didn’t necessarily invent the personal computer, but they made them so easy to use that they became household goods. Henry Ford didn’t invent the automobile, but figured out a method (the assembly line) to make them better, faster, and cheaper. Mark Zuckerberg took what had been a college project and turned it into Facebook. And Estee Lauder made her first cosmetics in pots and pans in her kitchen.

Some goods and services (such as computers and cars) would be impossible to produce without technology. Technology is hard to define, but you know it when you see it. It generally involves a producer to make something better, stronger, faster, and more cheaply. It often revolutionizes whole industries (think of the machine that produces computer chips). In the automobile industry, almost all welding is now done by robots, not humans. Even the course you’re taking is the beneficiary of technology — the personal computer, the World Wide Web, and web publishing programs.


The Biggies: Scarcity and Choice

A difficult but inescapable truth: resources are limited. There’s only so much gold in the world (that’s why it’s so expensive). If coffee grew everywhere on the planet, its price would be much lower. And, as you probably know, you have only so much money at any given time.

Another difficult but inescapable truth: wants tend to be unlimited. If one stick of gum is good, three are better. You want more money (who doesn’t?). Maybe you want to buy a new car every year. Scarcity is the central issue in economics, and determines almost all economic behavior. Here’s a diagram that may help you understand these concepts:

econ pic 1

One thing to keep in mind when discussing needs and wants is that there are basic needs (also called necessaries) such as food, clothing, and shelter. Higher-order wants, such as a race car or a handmade suit are in the “nice-to-have-but-not-need-to-have” category. They might be better called wants. A Rolls-Royce isn’t going to do you much good if you don’t have enough food to eat.

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