BSEH SS Economics common mistakes
BSEH SS Economics · Understand the traps and how to avoid them.
Writing the definition of microeconomics as 'the study of small economic units' and stopping there, then failing to apply it to a given situation (e.g., deciding whether a firm's pricing decision or a national inflation rate falls under micro or macro).
The 'small vs. large' shorthand is the first thing taught and the easiest to memorize, so candidates treat it as complete. It gives no operational test for borderline cases such as wage determination in one industry versus aggregate employment.
What to do instead
Replace the shorthand with the operational criterion: microeconomics studies individual decision-making units (a consumer, a firm, one market) and the allocation of resources through individual prices; macroeconomics studies aggregates (national income, general price level, total employment). Practise classifying ten real headlines and state which unit or aggregate is the subject.
Treating opportunity cost as 'the money paid' for a choice, or as the sum of all alternatives forgone, rather than the value of the single next-best alternative.
Everyday usage equates cost with price, and the 'next best' single-alternative rule is counterintuitive; students naturally want to add up everything given up.
What to do instead
Drill the exact definition: opportunity cost is the value of the next best alternative forgone, measured in the units of that alternative, not in money unless money is that alternative. Work numerical examples with three options where the answer is the second-ranked option only, and include a case where the chosen option costs nothing in money but still has positive opportunity cost (e.g., self-owned land used for farming).
Drawing demand and supply curves without labelling axes and units, or shifting the curve instead of moving along it when the good's own price changes, and then reading off a wrong equilibrium.
Diagrams are reproduced from memory without the discipline of axis labels, and the distinction between a change in quantity demanded (own-price change) and a change in demand (other determinants) is learned verbally but not practised on graphs.
What to do instead
Adopt a fixed diagram routine: label price on the vertical axis and quantity on the horizontal, mark the original equilibrium, then state in words which determinant changed before touching the curve. Use a two-column checklist - own price → movement along the curve; income, prices of related goods, tastes, expectations → shift. Answer every diagram question with a one-line verbal conclusion stating the direction of change in equilibrium price and quantity.
Computing price elasticity of demand with the wrong base (dividing by the new price or new quantity instead of the original) or ignoring the sign and misclassifying goods as substitutes when the cross-price elasticity is negative.
The percentage-change formula looks symmetric, so students pick whichever base is convenient; and sign conventions for cross-price and income elasticity are memorized without being tied to the underlying relationship between goods.
What to do instead
Always write the formula explicitly as (ΔQ/Q) × (P/ΔP) using the original values, and state the convention used if the examiner permits the midpoint method. For cross-price elasticity, reason first: if a rise in the price of tea raises demand for coffee, the relationship is substitutive and elasticity is positive; complements give negative values. For income elasticity, negative means inferior good, positive but less than one means necessity, greater than one means luxury.
Confusing the law of variable proportions with returns to scale, and asserting that diminishing marginal product means total product is falling.
Both describe input–output relationships and both use the word 'returns', so the short-run/long-run distinction is lost. Students also conflate a falling marginal product with a falling total product.
What to do instead
Anchor the distinction: variable proportions hold at least one input fixed (short run) and concern the marginal product of the variable input; returns to scale vary all inputs proportionally (long run). Then learn the stage logic: total product rises while marginal product is positive, is maximised where marginal product is zero, and falls only when marginal product is negative. Draw the TP–MP–AP curves together once from a table of numbers so the relationship between the curves is seen, not memorized.
Classifying market forms by the number of firms alone, so that a market with two firms is automatically called perfect competition or a market with many firms is called monopolistic competition, without checking product differentiation and entry conditions.
Textbook summaries reduce each market to a headline feature, and the number of sellers is the most visible one. The other defining features - homogeneity of product, freedom of entry and exit, price-setting power, selling costs - are treated as decoration.
What to do instead
Build a comparison grid with rows for number of sellers, nature of product, freedom of entry and exit, price control, selling costs, and demand curve slope, and fill it for all four forms. Then answer classification questions by checking features in order: product homogeneity first, then entry barriers, then price-setting power. Note explicitly that a homogeneous-product market with free entry is competitive regardless of whether the count is 'many' or 'a few'.
Mixing up national income aggregates - adding transfer payments to national income, treating depreciation as a factor income, or reporting GDP at market prices when the question asks for NNP at factor cost.
The aggregate names differ by one word (domestic vs. national, market price vs. factor cost, gross vs. net) and the adjustments are applied in an arbitrary order when the student is under time pressure.
What to do instead
Use a fixed ladder and write it at the top of the answer: GDP at market prices → subtract depreciation → NDP at market prices → subtract net indirect taxes → NDP at factor cost → add net factor income from abroad → NNP at factor cost (national income). Treat transfers (pensions, scholarships, unemployment allowance) as excluded because they are not payments for productive services. Check each adjustment against the definition of the aggregate before finalising the figure.
Describing the money multiplier as a fixed number, or asserting that the central bank directly sets the money supply by printing notes, without linking it to the reserve ratio and the currency–deposit ratio.
The credit-creation process is taught as a story about a single bank multiplying deposits, and the algebra of the multiplier is memorized as a constant rather than as a ratio that depends on behaviour.
What to do instead
Derive the multiplier once from the reserve ratio: with a required reserve ratio r, the deposit multiplier is 1/r, and the broader money multiplier also depends on the currency–deposit ratio and excess reserves held by banks. Practise a numerical example (a fresh deposit of a stated amount with a stated reserve ratio) and state clearly that the central bank influences the monetary base and reserve requirements but cannot fix the final money stock because bank and public behaviour intervene.
Treating the investment multiplier as 1/(1 − MPC) but then applying the full multiplier to a change in a lump-sum tax, or ignoring that an increase in government spending and an equal increase in taxes do not cancel out.
Only the government-spending multiplier is practised, so every fiscal change is plugged into the same formula. The tax multiplier's smaller magnitude and the balanced-budget result are not internalized.
What to do instead
Learn both multipliers together: the government expenditure multiplier is 1/(1 − MPC) and the lump-sum tax multiplier is −MPC/(1 − MPC), so a tax cut raises income by less than an equal rise in spending. Work the balanced-budget case numerically to see that equal increases in spending and taxes raise income by exactly the increase in spending when the tax is lump-sum. Always identify which instrument changed before selecting a formula.
Reading a balance-of-payments statement as a single ledger, so that a current account deficit is said to be 'financed by reserves' without distinguishing autonomous from accommodating transactions, or claiming the BoP always balances in the ordinary sense.
The accounting identity that the BoP must balance is confused with the economic question of whether a deficit is sustainable, and the current/capital account split is not applied to the transactions given.
What to do instead
Classify every transaction in the question into current account (goods, services, income, unilateral transfers) or capital account (loans, investments, reserves) before summing. State the identity explicitly: the current account balance plus the capital account balance plus change in reserves equals zero by construction. Then explain that the balance is achieved through accommodating flows, which is why a deficit reflects a need for financing rather than a bookkeeping error. Apply the same discipline to exchange-rate questions: identify the regime (fixed or flexible) before predicting the effect of a change in demand or supply of foreign exchange.