Basic concepts

Traps in Basic concepts

• Misdefines opportunity cost
  Opportunity cost = the value of the NEXT BEST alternative given up. List alternatives, rank them, take only the second choice.
• Confuses cost concepts
  TC = TFC + TVC. AC = TC/Q. MC = ΔTC/ΔQ. Fixed costs do not change with output.
• Inflation misconceptions
  Demand-pull: too much money chasing few goods. Cost-push: rising costs. Debtors and holders of real assets gain; creditors and fixed-income earners lose.
• Confuses movement along and shift of the demand curve
  A change in the good's OWN price causes movement ALONG the curve. Changes in income, tastes, prices of related goods etc. SHIFT the curve.
• Applies the rule for the opposite case
  Before answering, name the case in the stem (inelastic? price floor ABOVE equilibrium? point INSIDE the PPC?) and recall the rule for that case only.
• Confuses a movement along a curve with a shift
  Own price changes → movement ALONG the curve. Any other factor (income, tastes, price of related goods, costs) → SHIFT of the curve.
• Confuses scale of preference, wants and choice
  Wants are unlimited; resources are scarce → choice. A scale of preference ranks wants in order of importance. Free goods (air) have no opportunity cost; economic goods are scarce and command a price.
• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.
• Reverses the direction of the effect
  Trace the chain step by step (e.g. buying securities → banks gain cash → money supply rises) and check the sign at every link.
• Stops at a different economic quantity
  Underline what the question asks for and check the final number is THAT quantity, not a step on the way.
• Over-generalises a rule
  Economic laws hold 'other things being equal' and within limits. Be suspicious of options with always/never/all.
• Chooses a true but irrelevant statement
  Re-read the question's key term and test each option against it, not against whether it is true in general.
• Misunderstands public goods and externalities
  Public goods are non-rival and non-excludable (street lighting, defence) – free-rider problem. Merit goods (education, health) are under-consumed if left to the market. Externalities: costs/benefits to third parties (pollution = negative; vaccination = positive).
• Confuses types of elasticity
  Income elasticity: + normal, − inferior. Cross elasticity: + substitutes, − complements. PED is usually negative; |PED| compared with 1.
• Utility theory errors
  Marginal utility = change in total utility from one more unit; it diminishes. Total utility is maximum when MU = 0. Consumer equilibrium: MUa/Pa = MUb/Pb.
• Confuses laws of returns and returns to scale
  Law of diminishing returns: adding a variable factor to a FIXED factor eventually lowers marginal product (short run). Returns to scale: all factors changed together (long run).
• Confuses monetary and fiscal policy tools
  Monetary (central bank): interest/policy rate, open market operations, reserve requirements. Fiscal (government): taxation and public spending, budget deficit/surplus.
• Confuses tax systems
  Look at the AVERAGE rate: rises with income = progressive; falls = regressive; constant = proportional.
• Confuses functions of money
  Medium of exchange removes double coincidence of wants; unit of account measures value; store of value keeps purchasing power over time; standard of deferred payment settles future debts.
• Picks another type in the same classification
  Learn each classification as a table of types with one defining feature each (monopoly: one seller; monopsony: one buyer; command economy: central planning).
• Confuses forms of business organisation
  Sole trader: one owner, unlimited liability. Partnership: 2–20 partners, usually unlimited liability. Limited company: separate legal entity, limited liability. Co-operative: one member one vote, surplus shared by patronage.
• Confuses international economic organisations
  IMF: short-term balance-of-payments support. World Bank (IBRD): long-term development loans. WTO: rules of world trade. OPEC: oil-exporters' production policy. ECOWAS: West African economic integration.