BSSE Economics 1443 common mistakes
BSSE Economics 1443 · Understand the traps and how to avoid them.
Treating opportunity cost as only the money paid, so when asked for the opportunity cost of a choice the candidate reports the explicit price and omits the value of the best forgone alternative.
Everyday language equates cost with cash outflow, and textbook examples with tuition or ticket prices reinforce the habit of reading only the explicit number on the page.
What to do instead
Before answering, write two columns labelled 'explicit' and 'forgone' and force an entry in each; then state opportunity cost as the sum. Practise on choices with zero money price (a free hour, a student discount) so the forgone column cannot be skipped.
Shifting the demand curve when a good's own price changes, then reading a movement along the curve as a change in demand.
Price is the most visually salient variable, and the axes make 'price changed' look like 'the curve moved'; candidates blur the distinction between a determinant and the variable on the axis.
What to do instead
Adopt a rule: own price moves you along the curve; any other determinant shifts it. Drill with a list of determinants, classifying each scenario as 'slide' or 'shift' before drawing anything, and label the arrow direction on the graph.
Computing elasticity and then ignoring its magnitude, concluding that raising price always raises revenue or that a tax always falls mostly on buyers.
Percentage-change arithmetic is completed correctly, but the answer stops at the number; candidates do not connect the coefficient to the revenue or incidence question actually being asked.
What to do instead
Make the elasticity value the middle step, not the end: after computing, write 'elastic means revenue falls when price rises' or 'inelastic demand means buyers bear most of the tax' and finish the sentence before moving on. Use the midpoint formula to avoid base ambiguity.
Mixing up diminishing marginal returns with diseconomies of scale, or placing the marginal cost curve so it does not cross average variable and average total cost at their minima.
Both ideas involve costs eventually rising as output grows, and the short-run versus long-run distinction (fixed versus all inputs variable) is easy to collapse under time pressure.
What to do instead
Anchor each concept to its time frame: diminishing returns requires at least one fixed input in the short run; diseconomies of scale requires all inputs variable. When sketching, always draw MC through the minimum of AVC and ATC and check that MC lies below average cost whenever average cost is falling.
Applying the price-equals-marginal-cost rule to a monopolist, or asserting that a firm in perfect competition can choose a price above the market price.
The profit-maximisation condition MR = MC is learned as a single formula and then applied without checking whether the firm is a price taker or price maker, so the marginal revenue equals price shortcut is used in the wrong structure.
What to do instead
Before solving, state the structure and whether MR equals price. For a price taker, set P = MC; for a price maker, derive MR from the demand curve (twice the slope for a linear demand) and set MR = MC, then read price off the demand curve.
Shifting the labour demand curve when the wage changes, or claiming a monopsonist hires where supply equals marginal revenue product.
The same axis-versus-determinant confusion from product markets recurs in factor markets, and candidates carry over the competitive hiring rule without adjusting for the upward-sloping labour supply the firm faces.
What to do instead
Treat the wage as the price on the axis: a wage change is a movement along labour supply, while changes in output price or productivity shift labour demand. For monopsony, draw the marginal factor cost curve above supply and hire where MFC equals MRP, then read the wage off the supply curve.
Describing a negative externality as inefficient without specifying overproduction relative to the social optimum, or proposing a ban when a Pigouvian tax or tradable permit is the proportionate instrument.
The word 'negative' triggers a moral reaction, and candidates answer with the direction of harm rather than the size of the gap between private and social cost or benefit.
What to do instead
Use a fixed template: identify private versus social marginal cost or benefit, state whether output is above or below the efficient level, draw the deadweight-loss triangle, then choose an instrument that prices the gap. Say explicitly why a ban overshoots when the efficient quantity is positive.
Counting transfer payments, intermediate goods, or second-hand sales in GDP, or adding nominal values across years to measure growth.
All three look like income or spending to a candidate reasoning from everyday experience, and nominal figures are the ones printed in the data table, so no deflating step feels necessary.
What to do instead
Apply three screening questions to every item: is it newly produced this period, is it a final good, and is it produced domestically? Then convert to real terms using a price index before comparing years, and show the deflating division explicitly in the working.
Treating an increase in the money supply as directly raising output in the long run, or confusing the money multiplier with the reserve ratio when computing deposit expansion.
The short-run liquidity story is memorable and gets overgeneralised, and the multiplier formula invites plugging the reserve ratio in directly instead of its reciprocal.
What to do instead
Separate horizons in every answer: short run, money affects interest rates and possibly output; long run, it affects the price level. For expansion, write the multiplier as one divided by the reserve ratio, then multiply by the initial excess reserves, and check the answer is larger than the injection.
Confusing a change in the quantity of money with a change in the interest rate when explaining monetary policy transmission, so the answer jumps from open-market operations straight to inflation without the intermediate links.
Policy transmission is a chain of steps, and candidates under exam pressure compress it, dropping the mechanism that connects the central bank action to the final variable.
What to do instead
Rehearse the chain aloud until it is automatic: policy instrument, bank reserves, money supply, interest rate, investment and consumption, aggregate demand, output and price level. In written answers, number each link so a missing step is visible.