Praxis Economics common mistakes
Praxis Economics · Understand the traps and how to avoid them.
Computing opportunity cost as the sum of both alternatives' values, or reporting only the dollar price paid, instead of measuring the value of the next-best forgone option.
Everyday usage treats 'cost' as money spent, and candidates add together all alternatives they gave up rather than isolating the single highest-valued one.
What to do instead
Practice a fixed routine: list options, rank them by value, drop the chosen one, and report the value of the highest remaining option. Drill with non-monetary examples (an hour of study vs. an hour of work) so the concept is not tied to cash.
Shifting a demand curve when a determinant of supply changes (or vice versa), or moving along a curve when a non-price determinant changes.
Candidates memorize 'price changes quantity' without classifying each scenario's variable as a demand shifter, a supply shifter, or the good's own price.
What to do instead
Before answering, write the scenario's variable in one column and label it: own price (movement along the curve) or determinant such as income, tastes, input costs, technology, expectations, number of buyers/sellers (curve shift). Build a two-column shifter table and rehearse it until classification is automatic.
Confusing a change in quantity demanded with a change in demand, and then predicting the wrong new equilibrium price and quantity.
The terminology sounds interchangeable in ordinary speech, and exam distractors deliberately swap the phrases.
What to do instead
Adopt strict vocabulary: 'increase in demand' means the curve moved right; 'increase in quantity demanded' means a lower price moved you down the curve. After each shift, redraw the diagram and read off the direction of both equilibrium price and quantity before selecting an answer.
Assuming a price ceiling above equilibrium or a price floor below equilibrium changes market outcomes, or forgetting that binding controls create shortages and surpluses.
Candidates remember 'ceilings cause shortages' as a rule without checking whether the control is binding relative to equilibrium.
What to do instead
Always sketch the equilibrium first, then draw the control and test whether it binds. State the consequence explicitly: a binding ceiling below equilibrium creates a shortage; a binding floor above equilibrium creates a surplus; a non-binding control is inert. Practice items where the control is non-binding, since those are the common traps.
Treating accounting profit and economic profit as the same number, or omitting implicit costs such as forgone salary and forgone interest on invested capital.
Firms report accounting profit, and candidates default to the visible revenue-minus-explicit-cost calculation.
What to do instead
For every profit question, write two lines: explicit costs only (accounting) and explicit plus implicit costs (economic). Force yourself to name at least one implicit cost, such as the owner's forgone wage or the normal return on equity, before computing.
Getting the direction of the income and substitution effects wrong, or misidentifying goods as normal, inferior, or Giffen, when price changes.
The two effects can run in opposite directions for inferior goods, and candidates apply a single 'higher price means buy less' rule universally.
What to do instead
Use a decision tree: for a price increase, the substitution effect always reduces quantity; the income effect reduces quantity for normal goods and raises it for inferior goods; only when the income effect dominates does quantity rise (Giffen). Work through one numerical example per good type until the pattern is stable.
Confusing changes in GDP with changes in the price level, or treating a nominal GDP increase as real growth without deflating.
Both series usually rise over time, and the exam supplies nominal figures with a price index that candidates forget to apply.
What to do instead
Whenever a nominal figure and a price index appear, immediately compute real GDP as nominal divided by the index (in decimal form) times 100. Then state separately what happened to output and what happened to prices. Practice items where nominal GDP rises while real GDP falls.
Mixing up the tools and timing of fiscal versus monetary policy, including who controls each and which lags apply.
Both are 'stimulus' or 'contraction' in casual language, and candidates blur the institution (legislature and treasury versus central bank) and the transmission channel.
What to do instead
Maintain a comparison table with rows for controller, primary tools, transmission mechanism, and recognition/implementation lags. For each policy scenario, name the controller and the specific tool before predicting the effect on output, employment, and the price level.
Applying absolute advantage instead of comparative advantage to determine specialization and gains from trade, or miscomputing opportunity cost ratios from a production possibilities table.
Absolute advantage is intuitive ('who produces more'), while comparative advantage requires an opportunity-cost ratio that candidates compute upside down.
What to do instead
Always convert the table to opportunity cost per unit for each good (what must be given up to make one more unit) and compare those ratios. State the rule aloud: specialize where opportunity cost is lower, even if the other producer is absolutely better at everything.
Predicting the effect of a tariff or quota on price, quantity, and welfare without accounting for the lost consumer surplus and deadweight loss, or confusing who gains and who loses.
Candidates focus on the protected domestic producers and the government's tariff revenue while forgetting consumers and the efficiency loss from reduced trade.
What to do instead
Draw the standard import diagram and label four areas every time: producer surplus gain, government revenue, deadweight loss triangles from overproduction and underconsumption, and consumer surplus loss. Net welfare change should be stated as negative for a small open economy imposing a tariff.