Price determination

Traps in Price determination

• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.
• 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.
• 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.
• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Uses the wrong arithmetic operation
  Write the definition in words first (TR = price × quantity; ATC = TC ÷ Q) and only then put in numbers. Check units: totals and averages cannot be added.
• 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.
• Errors in finding market equilibrium
  At equilibrium Qd = Qs. Solve for P, then substitute to find Q. If price is above equilibrium, Qs > Qd → surplus (excess supply); below equilibrium, Qd > Qs → shortage (excess demand).
• Misreads price ceilings and floors
  A maximum price set BELOW equilibrium causes shortage (black markets); a minimum price ABOVE equilibrium causes surplus.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• 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.
• 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.