Production

Traps in Production

• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• 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 market structures
  Perfect competition: many firms, homogeneous product, price takers. Monopoly: one seller, barriers. Oligopoly: few interdependent firms.
• 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 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.
• 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.
• Mismatches factors of production and rewards
  Land → rent; labour → wages; capital → interest; entrepreneur → profit.
• 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.
• Over-generalises a rule
  Economic laws hold 'other things being equal' and within limits. Be suspicious of options with always/never/all.
• 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).
• Confuses total, average and marginal product
  AP = TP/L; MP = ΔTP/ΔL. When MP > AP, AP rises; when MP < AP, AP falls; MP = AP at the maximum of AP. TP is maximum when MP = 0.
• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.