CLEP Principles of Microeconomics common mistakes
CLEP Principles of Microeconomics · Understand the traps and how to avoid them.
When a price change causes movement along a demand curve, labelling it a 'shift in demand' and then shifting the curve on the graph, which changes the equilibrium quantity in the wrong direction.
Candidates memorise 'price up, demand down' and treat every change as a curve shift; the distinction between a change in quantity demanded (movement along the curve, caused by the good's own price) and a change in demand (curve shift, caused by income, tastes, prices of related goods, expectations, number of buyers) is never firmly separated.
What to do instead
Before drawing anything, write the cause of the change. If the cause is the good's own price, move a point along the existing curve and change only quantity. If the cause is any non-price determinant, shift the curve and hold price fixed at the old equilibrium to read the new quantity. Drill with a two-column list: 'own price' versus 'everything else'.
Treating a price ceiling set above equilibrium (or a price floor set below it) as binding and predicting a shortage or surplus, when in fact the market simply stays at equilibrium.
Candidates pattern-match 'ceiling = shortage, floor = surplus' without checking whether the legal limit lies above or below the equilibrium price, so they skip the comparison step entirely.
What to do instead
Always draw the equilibrium price first, then place the legal price and ask: does this constraint actually prevent the market from clearing? A ceiling only binds below equilibrium; a floor only binds above it. If it does not bind, state explicitly that price and quantity are unchanged.
Answering 'who bears the tax' by naming the party legally required to remit the tax, rather than comparing elasticities to allocate the incidence.
The statutory label (seller collects, buyer pays) is salient and easy to recall, while the economic incidence rule (the less elastic side bears more of the burden) requires a supply-and-demand diagram with a wedge and is easily forgotten under time pressure.
What to do instead
Redraw with the tax as a vertical wedge between the supply and demand curves, mark the new buyer price and seller price, and compare the two price changes to the pre-tax equilibrium. State the rule in one line: the more inelastic side bears the larger share, regardless of who writes the cheque.
Confusing accounting profit with economic profit by omitting implicit costs such as forgone wages or forgone interest on owner capital.
Everyday usage treats 'profit' as revenue minus cash outlays, and exam questions supply an explicit salary the owner gave up precisely to test whether the candidate adds it back as a cost.
What to do instead
Build a fixed template: total revenue minus explicit costs minus implicit costs equals economic profit; total revenue minus explicit costs equals accounting profit. When a stem mentions an owner leaving a job or using owned capital, immediately list the forgone salary or forgone rental value as an implicit cost.
Assuming a firm should shut down whenever it is making a loss, instead of comparing price with average variable cost in the short run.
The intuition that losses mean exit is strong, and candidates blur the short-run shutdown rule with the long-run exit rule, forgetting that fixed costs are sunk in the short run.
What to do instead
Memorise two distinct thresholds: shut down in the short run if price falls below minimum average variable cost; exit in the long run if price falls below minimum average total cost. In any loss scenario, ask whether revenue covers variable cost, and if it does, explain that operating limits the loss to fixed cost.
Describing a perfectly competitive firm as choosing its price, or drawing its demand curve as downward sloping, when the firm is a price taker facing a horizontal demand at the market price.
Candidates carry the monopoly picture over to all market structures, and the phrase 'the firm faces the market demand curve' is misread as applying to the individual seller rather than the industry.
What to do instead
Draw two panels side by side: the industry diagram with a downward-sloping demand and the individual firm with a horizontal demand at the equilibrium price. State the profit-maximising condition in both structures as marginal revenue equals marginal cost, and note that for the price taker marginal revenue equals price.
For a monopolist, reading the profit-maximising price off the intersection of marginal revenue and marginal cost instead of going up to the demand curve at that quantity.
The marginal revenue equals marginal cost rule is learned as 'the answer', so candidates stop at the intersection and report that price, missing the separate step of translating quantity into the price buyers will pay.
What to do instead
Use a fixed three-step routine: set marginal revenue equal to marginal cost to get quantity; move vertically from that quantity to the demand curve; read the price horizontally. Add a check that the resulting price exceeds marginal cost, which is the source of monopoly markup.
Applying the profit-maximising hiring rule by comparing the wage with the marginal product of labour instead of with marginal revenue product, and ignoring how product-market power changes that comparison.
The marginal product is the more familiar number, and the extra step of multiplying by marginal revenue (which differs from price under imperfect competition) is dropped, so the derived-demand logic of factor markets is lost.
What to do instead
Write the rule as hire until marginal revenue product equals the wage, and expand marginal revenue product as marginal product times marginal revenue. Note the special case: under perfect competition marginal revenue equals price, so the rule becomes marginal product times price equals the wage.
Claiming that a minimum wage necessarily reduces employment in every case, without distinguishing a competitive labour market from a monopsonistic one.
The competitive-model diagram is the only one most candidates practise, so the monopsony result, where a binding minimum wage can raise both wages and employment up to the competitive level, is never applied.
What to do instead
Learn the two diagrams as a pair. In competition, a floor above the equilibrium wage cuts quantity of labour demanded. In monopsony, the firm's marginal factor cost lies above the labour supply curve, and a minimum wage set between the monopsony wage and the competitive wage can increase employment. Answer according to which market structure the stem describes.
Treating a negative externality as something corrected by a subsidy, or asserting that a Pigouvian tax eliminates the entire externality by driving output to zero.
The direction of the correction is easy to invert under time pressure, and the word 'tax' invites the overstatement that the polluting activity should stop altogether rather than be reduced to the socially optimal level.
What to do instead
Anchor the rule in the gap between private and social cost. A negative externality means marginal social cost exceeds marginal private cost, so the fix is a tax or a cap that moves output down to where marginal social benefit equals marginal social cost, not to zero. For a positive externality, where marginal social benefit exceeds marginal private benefit, the fix is a subsidy.