GCE A/L Economics common mistakes
GCE A/L Economics · Understand the traps and how to avoid them.
In multiple-choice and data-response questions, defining opportunity cost as the money paid for a choice, or as the total value of all rejected alternatives, rather than as the value of the next best alternative forgone.
Everyday language equates cost with money, and candidates memorise the phrase without applying it to a production possibility frontier or a real choice.
What to do instead
Always write the definition as the value of the next best alternative forgone. On a PPF, identify the quantity of the other good sacrificed when moving between points; only convert to money values if prices are given and the question asks for them.
When the price of the good itself changes, drawing a new demand or supply curve instead of a movement along the existing one; when a non-price determinant changes, moving along the curve instead of shifting it.
Candidates memorise price and quantity diagrams but do not identify which variable has changed, so they confuse endogenous price changes with exogenous shifts.
What to do instead
Before drawing, label the variable that changed. Own price change means movement along the curve. Income, tastes, prices of related goods, expectations or number of buyers shift demand; input costs, technology, taxes, subsidies, expectations or number of sellers shift supply.
Calculating price elasticity of demand as the absolute change in quantity divided by the absolute change in price, then treating any negative value as inelastic, or inferring elasticity from a total revenue change without checking the direction of the price change.
Shortcut formulas and sign confusion replace the percentage-change definition, and total revenue tests are recalled as a rule rather than derived.
What to do instead
Use percentage change in quantity divided by percentage change in price, and take the absolute value. For arc elasticity use midpoint averages. If price rises and total revenue falls, demand is elastic; if total revenue rises, demand is inelastic; if unchanged, elasticity is unit.
In shutdown or continuation questions, comparing price with average total cost rather than average variable cost, and counting normal profit as if it were above-normal profit.
Average total cost includes fixed costs that are sunk in the short run, and candidates forget that normal profit is an implicit cost already included in the cost curves.
What to do instead
Shut down if price is below average variable cost; continue in the short run if price is at least average variable cost, even when making a loss. Define economic profit as total revenue minus explicit and implicit costs, so normal profit means zero economic profit.
Drawing the long-run equilibrium of a perfectly competitive firm with price above minimum average cost and positive economic profit, or placing a monopolist's profit-maximising output where price equals marginal cost.
Candidates mix short-run and long-run outcomes, and transfer the competitive price-equals-marginal-cost condition to monopoly without adjusting for downward-sloping demand and marginal revenue.
What to do instead
For perfect competition, long-run entry shifts supply until price equals minimum average cost and economic profit is zero. For monopoly, set marginal revenue equal to marginal cost for output, then read price from the demand curve above marginal cost, and show the deadweight-loss triangle.
In an externality question, recommending a tax equal to the whole marginal external cost per unit without identifying the socially optimal quantity, or claiming a subsidy always improves welfare without checking the marginal external benefit.
Policy answers become slogans such as tax the polluter or subsidise the good, without linking the instrument to the marginal externality at the efficient output.
What to do instead
Draw marginal private and social cost or benefit curves, identify the market output and the socially optimal output, and set the tax equal to marginal external cost at the optimum or the subsidy equal to marginal external benefit at the optimum. Then evaluate incidence, price elasticity and enforcement.
Including transfer payments, second-hand sales, intermediate goods or purely financial transactions when calculating GDP by the expenditure or income method.
Candidates treat any money flow as production and forget that GDP measures final output and factor incomes, not all transactions.
What to do instead
Use GDP equals consumption plus investment plus government spending plus exports minus imports. Exclude transfers, intermediate goods and second-hand sales, and use value added. Distinguish nominal from real GDP by deflating with a price index.
Explaining credit creation as if banks can create an unlimited multiple of deposits, and describing any rise in the price level as inflation without distinguishing a one-off increase from a sustained increase.
The credit multiplier is memorised without its assumptions, and inflation is defined loosely as prices rising rather than as a sustained rise in the general price level.
What to do instead
State that the multiplier equals one divided by the reserve ratio only with no cash leakage, no excess reserves and sufficient loan demand. Define inflation as a sustained rise in the general price level, measure it with a consumer price index, and distinguish demand-pull from cost-push causes.
Recommending expansionary fiscal or monetary policy for any type of unemployment, and presenting the policy as certain to work without evaluating time lags, crowding out or confidence effects.
Candidates match unemployment with demand management mechanically and omit the type of unemployment and the conditions under which policy is effective.
What to do instead
Classify unemployment first. Use demand management for demand-deficient unemployment, but supply-side measures such as retraining and labour-market reform for structural unemployment. Evaluate time lags, crowding out, multiplier size, confidence and possible inflation.
Treating a current account deficit as automatically a sign of economic weakness, and recording an import as a credit or an export as a debit in the balance of payments.
A mercantilist intuition equates surpluses with success, and candidates confuse the direction of debit and credit entries.
What to do instead
Record exports and inflows as credits, imports and outflows as debits, and use the identity that the current account plus the capital and financial accounts sums to zero apart from errors and omissions. Assess a deficit by its causes, size, duration and financing, not by its sign alone.