LC Economics common mistakes
LC Economics · Understand the traps and how to avoid them.
Describing a movement along the demand or supply curve and a shift of the curve as if they were the same event, e.g. writing that a price rise 'shifts demand left' or that an advertising campaign 'moves supply along the curve'.
Candidates learn the two diagrams side by side and memorise labels rather than the underlying cause: a change in the good's own price changes quantity demanded/supplied, while a change in a non-price determinant (income, tastes, prices of related goods, input costs, technology, expectations) shifts the curve. Under time pressure the phrase 'demand falls' is used loosely for both.
What to do instead
Before drawing anything, ask 'what changed?' If the only change is the good's own price, draw arrows along the existing curve and label the axes quantity/price. If any non-price determinant changed, draw a new curve and state which determinant moved it. Practise by writing one sentence per scenario naming the determinant and the direction of the shift before sketching.
Calculating elasticity with the wrong denominator or the wrong base, e.g. dividing the change in quantity by the new quantity, or reporting PED as a percentage rather than a coefficient, then misclassifying a good as elastic when it is inelastic.
The formula is remembered as 'change over original' without a fixed convention, and candidates rush the arithmetic. Many also forget that PED is negative and judge elasticity by the sign rather than the magnitude, or use the midpoint formula inconsistently when the question specifies it.
What to do instead
Write the formula explicitly at the start of every elasticity answer: PED = (% change in Qd)/(% change in P), with each percentage change computed as (new − old)/old unless the question says midpoint. Judge elasticity by |PED| compared with 1, and always state the interpretation in words ('inelastic, so revenue rises when price rises'). Do two practice calculations per elasticity type (PED, PES, YED, XED) until the arithmetic is automatic.
Treating points on or inside a production possibility frontier as equally efficient, or claiming that any point outside the frontier is reachable through trade without saying so, and failing to link the shape of the curve to increasing opportunity cost.
The PPF is taught as a simple 'inside = unemployed, on = efficient' rule, so candidates stop there and never explain why the curve bows outward. They also forget that growth or trade can shift the frontier rather than move a point along it, and they conflate a movement along the PPF with a shift of the PPF.
What to do instead
For every PPF question, state three things: points on the curve are productively efficient, points inside show underused resources, points beyond are unattainable without growth or trade. Then explain the concave shape with the law of increasing opportunity cost (resources are not equally suited to both goods) and distinguish a movement along the curve (reallocation) from an outward shift (more or better resources, technology).
Confusing accounting cost with economic cost, or normal profit with supernormal profit, so that a firm earning zero economic profit is described as 'making no profit' or 'about to exit'.
Textbook cost curves include implicit costs (the opportunity cost of the owner's capital and labour), but candidates default to the everyday meaning of cost as cash outlay. Normal profit is then treated as an amount added on top rather than as the minimum return required to keep the entrepreneur in the industry.
What to do instead
Adopt a fixed definition: economic cost = explicit + implicit cost; normal profit is the opportunity cost of entrepreneurship and is included in the cost curves. Zero economic profit means the firm is earning exactly normal profit and is covering all opportunity costs, so there is no incentive to exit. In exam answers, always state which concept of profit is being used before drawing conclusions about entry and exit.
Describing a monopoly or an oligopoly only by the number of firms, without linking structure to conduct and performance, e.g. asserting that a monopolist always charges the highest possible price or that oligopolists never compete on price.
Market structure questions invite a list of features, and candidates reproduce a memorised checklist (one firm, barriers to entry, price maker) without applying it to the scenario or to outcomes such as allocative and productive efficiency, deadweight loss, or strategic interdependence.
What to do instead
Structure every answer around structure → conduct → performance: number and size of firms, barriers to entry, degree of product differentiation, then pricing and non-price behaviour, then efficiency and consumer outcomes. Use the scenario's facts rather than generic labels, and qualify claims ('a monopolist is a price maker but is constrained by the demand curve and by potential entry').
Mixing up nominal and real values, or confusing GDP with GNP/GNI, when measuring national income, so that inflation is counted as growth or income earned abroad is wrongly included.
The distinction between 'at current prices' and 'at constant prices' is easy to state but easy to drop under pressure, and GDP versus GNP differs only by net factor income from abroad, which candidates routinely forget. They also omit the treatment of indirect taxes and subsidies when moving from market prices to factor cost.
What to do instead
Use a fixed checklist for any national income calculation: which concept (GDP/GNP), which price basis (market vs factor cost), which measure (nominal vs real). Convert nominal to real by deflating with a price index, and adjust GDP to GNP by adding net factor income from abroad. Show each step in the working so the marker can see which adjustment was made.
Treating an increase in the money supply or a cut in the policy rate as automatically inflationary, or as automatically expansionary, without tracing the transmission mechanism through borrowing, investment, aggregate demand and the output gap.
Monetary policy is learned as a slogan ('lower rates, more spending') and the intermediate links are skipped. Candidates then cannot explain why the same policy may raise output in a recession but only prices when the economy is near capacity, or why lags and expectations matter.
What to do instead
Write the chain explicitly every time: policy rate → market rates and credit conditions → borrowing and asset prices → consumption and investment → aggregate demand → output and the price level, conditional on spare capacity. Add a sentence on the state of the output gap and on expectations, and note the transmission lag. This also earns marks for evaluation.
Confusing the budget deficit with the public debt, or describing a rise in the deficit as necessarily meaning the debt is unsustainable, without reference to GDP, interest rates or the primary balance.
The two terms sound interchangeable, and candidates do not distinguish a flow (annual borrowing) from a stock (accumulated debt). Sustainability is then judged on the size of the deficit alone, ignoring growth and the interest rate.
What to do instead
Define the deficit as a flow and the debt as a stock, and state that debt sustainability depends on the debt-to-GDP ratio, the interest rate relative to growth, and the primary balance. In evaluation, compare the interest rate with nominal growth and mention automatic stabilisers, because a deficit can rise in a recession without any discretionary policy change.
Classifying unemployment by symptom rather than by cause, e.g. calling all job losses in a recession 'structural', or labelling anyone out of work as 'frictionally unemployed', and then recommending the wrong policy.
The categories overlap in real cases, and candidates match on surface features (a factory closed, a worker is searching) instead of asking whether the cause is deficient demand, a mismatch of skills or location, seasonal patterns, or the normal time taken to match workers to vacancies.
What to do instead
Diagnose with two questions: is demand in the economy sufficient (if not, it is cyclical), and do the unemployed have the skills and location that vacancies require (if not, it is structural)? Then match policy: demand management for cyclical, retraining and mobility for structural, better job-matching information for frictional. State the reasoning, not just the label.
Reading a current account deficit as proof of economic weakness, or a depreciation as automatically improving the trade balance, without considering the causes of the flows, the Marshall-Lerner condition, or the J-curve.
Balance of payments topics are often reduced to 'surplus good, deficit bad', and the exchange-rate channel is assumed to work immediately. Candidates ignore that a current account deficit may reflect strong domestic investment and capital inflow, and that a weaker currency only helps if import and export demand are sufficiently price-elastic.
What to do instead
Separate the current account from the financial account and explain what each balance implies about saving, investment and capital flows. For a depreciation, state the Marshall-Lerner condition (|PED exports| + |PED imports| > 1) and the J-curve before concluding that the trade balance improves. Apply this to the data in the case rather than asserting the outcome.
Quoting figures from a table or chart without computing the relevant change, or describing a trend as 'increasing' when the series rises in money terms but falls in real or per-capita terms, and ignoring the base year or units.
Data-response questions reward speed, so candidates copy the first number they see instead of calculating percentages, index numbers or per-capita values. They also miss footnotes on units (millions versus billions), current versus constant prices, and the difference between a level and a rate of change.
What to do instead
Before writing, check the title, units, base year and footnotes, then compute at least one derived measure (percentage change, share of total, real or per-capita value). Quote figures with their units and year, and distinguish a change in the level from a change in the growth rate. Build this into a fixed opening routine for every data question.