MATSEC AM Economics common mistakes
MATSEC AM Economics · Understand the traps and how to avoid them.
In supply-and-demand diagrams, shifting the demand or supply curve when the event only changes quantity demanded/supplied at the current price, or shifting both curves to force the diagram back to the original price.
Candidates memorise 'price up means demand down' and do not separate a movement along a curve from a shift caused by a non-price determinant; they also try to restore the original equilibrium instead of accepting a new one.
What to do instead
Before drawing, name the non-price determinant and state which curve shifts. If price is the only change, show a movement along the existing curve. Label initial and new P and Q, state ceteris paribus, and practise contrasting 'the price of coffee rises' with 'consumers' income rises'.
Calculating price elasticity of demand as ΔQ/ΔP or ignoring the sign, and calling a steep demand curve 'inelastic' without computing; similarly confusing positive income elasticity with inferior goods.
The formula is recalled without percentage changes and without economic interpretation; slope is used as a shortcut for elasticity.
What to do instead
Use percentage changes or the midpoint formula, report absolute PED for price elasticity, then interpret: >1 elastic, <1 inelastic, =1 unit elastic. For YED, positive = normal, negative = inferior, >1 = luxury; for XED, positive = substitutes, negative = complements. Check each result against total revenue.
Drawing a price ceiling above equilibrium or a price floor below equilibrium and still claiming a shortage or surplus; omitting the quantity actually traded and the welfare loss when the control is binding.
Candidates remember 'ceilings cause shortages' without checking whether the control binds, and they do not compare the legal price with the equilibrium price.
What to do instead
Always compare the control with equilibrium: a ceiling binds only below equilibrium; a floor binds only above. If non-binding, state no effect. If binding, mark quantity traded at min(Qd,Qs) or max(Qd,Qs), label shortage/surplus, and discuss queues, black markets, quality changes and deadweight loss.
Confusing total utility with marginal utility, or stating consumer equilibrium is where marginal utility is highest rather than where MU per euro is equal across goods within the budget.
Utility tables are treated as totals, and the equimarginal condition is memorised without being linked to constrained choice.
What to do instead
Compute MU from total utility, show diminishing MU, then apply MUx/Px = MUy/Py subject to the budget constraint. Explain that if MUx/Px > MUy/Py, the consumer reallocates spending toward X. Link this to indifference-curve/budget-line tangency.
Treating fixed costs as avoidable in the short run, or stating that marginal cost cuts average cost at minimum average cost without checking the diagram; mixing diminishing returns with economies of scale.
Cost-curve relationships are learned as labels rather than from a numerical cost table, and the short-run/long-run distinction is weak.
What to do instead
Build a cost table: TFC constant, TVC changing, TC, AFC, AVC, ATC and MC. Show MC crossing AVC and ATC at their minima. Explain diminishing returns as a short-run phenomenon and economies of scale as a long-run phenomenon, then link cost curves to the firm's supply decision.
Awarding monopoly power to any firm with a differentiated product, or claiming perfect-competition firms earn supernormal profit in long-run equilibrium; confusing MR = MC with zero profit.
Market-structure assumptions are memorised as checklists without using entry barriers, substitutability and concentration; the profit-maximising condition is confused with the profit level.
What to do instead
Use a comparison table: number of firms, product type, entry/exit, price-taking versus price-making, and long-run profit. Draw profit maximisation at MR = MC, then compare AR with AC to show supernormal, normal or subnormal profit. Add deadweight loss for monopoly and P = minimum AC for perfect competition in the long run.
Using GDP and GNP interchangeably, adding transfer payments to GDP, counting intermediate goods, or comparing nominal GDP over time without converting to real GDP or per capita terms.
Definitions blur, the expenditure components are not understood as final spending, and inflation/population adjustments are skipped when evaluating living standards.
What to do instead
Write GDP = C + I + G + (X − M) and exclude transfers, intermediate goods and second-hand sales. Use GNP/GNI = GDP + net factor income from abroad. Convert with real GDP = nominal GDP/deflator × 100 and use GDP per capita for comparisons, then note distribution, informal activity and hours-worked limitations.
Saying 'inflation falls' when the inflation rate falls, labelling every price increase as demand-pull, or evaluating CPI without noting basket weights, substitution and quality changes.
The price level and the inflation rate are conflated, and AD/AS causes are not matched to the correct diagram.
What to do instead
Distinguish inflation, disinflation and deflation. Draw demand-pull as rightward AD and cost-push as leftward SRAS, then identify winners/losers and policy trade-offs. For CPI/HICP, discuss basket weights, substitution bias, quality changes and excluded items before using the index as a cost-of-living measure.
Classifying a construction worker laid off every winter as structurally unemployed, recommending retraining for cyclical unemployment, or counting discouraged workers as unemployed.
Unemployment types are defined by duration or by the worker's profile rather than by cause, and the labour-force definition is weak.
What to do instead
Match cause to type: cyclical = deficient AD; structural = skills/geography mismatch; frictional = search; seasonal = regular pattern. Match policy to cause: fiscal/monetary for cyclical, training/education for structural, job information for frictional. Define labour force as employed plus unemployed actively seeking work.
Putting tourism receipts or remittances in the capital/financial account, assuming a current-account deficit is always bad, or recommending exchange-rate depreciation for Malta without recognising euro membership and high import content.
Balance-of-payments structure is memorised superficially, and the small-open-economy context of Malta is ignored.
What to do instead
Use the current account (goods, services, primary income, secondary income), capital account and financial account. Tourism is a services export and remittances are secondary income, so both belong in the current account. Evaluate deficits by their financing and cause, and for Malta discuss tourism, financial services, gaming exports, imported fuel/food, EU/euro constraints and competitiveness rather than independent depreciation.