Theory of supply

Traps in Theory of supply

• 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.
• 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.
• 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.
• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.
• 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.
• Misreads price ceilings and floors
  A maximum price set BELOW equilibrium causes shortage (black markets); a minimum price ABOVE equilibrium causes surplus.
• 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 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.
• 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.
• 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.
• Over-generalises a rule
  Economic laws hold 'other things being equal' and within limits. Be suspicious of options with always/never/all.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Turns the formula upside down
  Learn the formula with its meaning: elasticity = responsiveness of QUANTITY, so %ΔQ is on top; k = 1/MPS = 1/(1 − MPC).
• 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).