Sunday, June 10, 2018

Common Errors/ Misperceptions in Paper 1 of 9708/12 Economics (CIE) (CAIE)

1. Money is NOT one of the factors of production. Resources/ inputs are strictly four only and they are none other than land, labour, capital and enterprise. To be considered as a factor of production, it must possess the feature of ready-to-be-use. Consider airline industry as an example. Pilots can be instructed to fly the airplane. Airplane itself enables the airline company to be able to provide flight services to its customers. However, money e.g. bank notes and coins cannot be instantly used to produce goods and services. They have to be converted into land, labour, capital and enterprise before any production process can commence

2. Enterprise must be a business-starter or owner. This is not true. Enterprise is someone who is willing to undertake business risks. It must also manage the other three factors of production. In this case, key/ management people like CEOs, CFOs, COOs and even division managers are completely fit to be known as enterprise as they fulfill the definition. It is worth noting that they are not business founders

3. Public transport is a public good. Just because the term 'public' is being used, that does not automatically imply that public transport is a public good. Do not classify a good/ service based on its name, instead, group it according to the features that it has. In this case, public transport is a merit good. It has economic benefits not just to the users but also to people around them e.g. reducing congestion and air pollution

4. Change in demand and change in quantity demanded are similar. No, they are not. Economists attempt to segregate the most important determinant (price) away from other 'not-so-important' determinants (advertisements, taste/ fashion, income, price of substitutes and price of complements). For the most important determinant, we give it a special name which is 'change in quantity demanded'. It involves movements along the same demand curve. It either contracts or expands

5. Change in supply and change in quantity supplied are similar. Again, they are not. Change in quantity supplied is due to the most influential determinant and that is 'price'. change in supply is due to 'less important' determinants such as indirect tax, subsidy, technology and wage costs. For a change in price, we say quantity supplied rises or falls. It will be a movement along the same supply curve. It either expands or contracts. There will be no shift, contrary to what some may think

6. Total revenue (TR) is different from total expenditure (TE) by households (P x Q). No, they are the same. What you pay is what the firms will get. If you pay more, the firms will receive more and likewise is true. If PED < 1, an increase in price will lead to an increase in TR and TE. Likewise, if PED > 1, a rise in price will lead to a fall in TR and TE

7. Elasticity is gradient. No, it is not and will never be. Gradient is the same along the same demand/ supply curve. However, elasticity varies from one pair of price and quantity to another

8. Flipping the formula of PED and PES. Instead of (% of change in QD/ % of change in price) and (% of change in QS/ % of change in price), they become (% of change in price/ % of change in QD) and (% of change in price/ % of change in QS). Do take note that, according to the definition, it is how sensitive is QD/ QS to a change in price. Whatever that is being 'to' will always be at the bottom. If you still think that they are difficult, then think of 'having Dinner on Plate' and 'having Supper on Plate'

9. Underestimating the importance of unity/ unitary PED. This concept is EXTREMELY important in our syllabus of Economics. Every time if you are given a hyperbola demand curve, you must be pre-informed that the total revenue/ expenditure will be unchanged regardless of whether the price increases or falls. It is also the case where total revenue/ expenditure is maximised when PED = 1

10. Ignoring the term 'effective' for both maximum and minimum price. For maximum price to be effective, the new price has to be set below the equilibrium. If, due to information failure, the price is accidentally set above equilibrium, then everything will be back to normal e.g. follow existing equilibrium price and quantity. There will be no effects at all. The same for effective minimum price where the line must be above the equilibrium price. After all, the aim is to protect producers from lower prices. If it were to be accidentally set below the equilibrium, then obviously producers will be disappointed as that will not be helpful to them. The market will revert back to the original equilibrium price and quantity

11. Only tax can be progressive. This is not true. Benefits can be progressive too. For income tax, the richer is an individual, the bigger will be the proportion of their income being paid out as tax. The concept works the same for benefits too. The poorer is the person, the greater is the amount of benefits that he/ she will receive. This would eventually cause the amount of benefits received to increase expressed as a percentage of income

12. Confuse between marginal tax rates and average tax rates. This results in being unable to perform calculations/ interpretations involving these two. Bear in mind that marginal tax rate is the additional rate of tax that will be applicable when income increases from one range to another. In the UK, there are three marginal tax rates, 20%, 40% and 45%. Average tax rate = amount of tax paid/ income

13. Free trade area means that there will be no trade barriers at all. In case if you think that member countries are free to export to one another, then you may be misinformed. Yes, according to TEXTBOOK definition, but NO in the real world. In ASEAN alone (which is a free trade area), there are about 6000 goods that are being subjected to various trade barriers. Check the link below:

14. Government spending, direct taxes and investment can only affect AD. This is true in the short-run. However, in the long run, they can have impact onto LRAS too. For instance, government spending onto healthcare will improve public health and as a result, there will be fewer absenteeism from workplace. This will reduce wage costs for firms. Lower direct tax e.g. income tax may increase one's incentive to work knowing that he/ she may get to keep a larger proportionate of disposable income. Investment will keep operational costs low as new technology tends to be more efficient. LRAS/ PPC will shift rightward

15. Depreciation affects only exports. This is untrue. It also affects imports. When the value of a currency falls, imports will become pricier. Ceteris paribus, less imports will be purchased

16. Unaware that an exchange rate may affect both demand-pull and cost-push inflation. My observation tells me that most candidates will only mention about cost-push inflation e.g. increasing/ reducing costs of import. What majority aren't aware of is, it can also increase or decrease (X - M) and hence AD

17. A country does not have to be paid in its own currency. In answering, we say that if we trade with another country, we must honour the transactions by paying that country their respective currency. However, the country that we trade with may request to be paid in another valuable currency e.g. dollar, pound, euro etc. Do watch out as this element/ idea has been tested several times in MCQ (sorry I can't remember which question but I have seen it before)

18. Unaware that trading possibility curve (TPC) is part of syllabus. It is the a frontier that both countries can achieve shall they choose to specialise and trade goods in which they have comparative advantge

19. Flipping between expenditure-dampening and expenditure - switching policies (This is usually due to rote-learning). How to remember then? The key lies in these two terms itself. To dampen/ reduce expenditure, income must be reduced and that is only possible through contractionary fiscal (cut government spending and raise taxes) and monetary policie (reduce money supply and increase interest rates). With lower income, less imports that can be purchased. Expenditure switching means measures to switch spending away from imports through methods like currency devaluations, subsidies, tariffs and quotas. All of them will increase price of imports relative to home-made goods 

20. Thinking that monetary policy involves only money supply and interest rates. In reality, it also involves currency devaluation/ revaluation, reducing/ increasing reserve requirements (amount of money that commercial banks must keep with them and cannot be lent out) and loose/ tight bank lending policies

Mistakes are always found on these areas:
1. Unable to perform calculations involving elasticity e.g. either flipping the formula, using the wrong formula or unable to interpret the information given

2. Unfortunately, elementary mistakes still seen in questions involving shifts of demand or/ and supply curves. Another one includes movements along the same demand/ supply curves

3. Unaware that total revenue/ expenditure will be unchanged if PED = -1

4. Unable to perform calculations involving consumer or/ and producer surplus e.g. problems with interpreting the areas

5.Unable to determine areas of tax revenue, tax incidence for consumers and firms and total subsidy payout by government. Therefore candidates have problems in calculations too

6. Lack of understanding especially with the terms of trade e.g. 1 apple < 1 banana < 4 apples involving the theory of comparative advantage

7. Difficulty to match the options given (A to D) to the diagram involving shifts in demand and supply of an exchange rate

8. Lack of understanding in terms of macroeconomic logic e.g. which macroeconomic parameters that can affect AD or/ and SRAS/ LRAS

9. Unable to satisfactorily interpret/ perform calculations involving CPI. Rate of inflation = (CPI2 - CPI1) / CPI1

10. Thought that deflation and disinflation are the same. The former means falling CPI and therefore negative rate of inflation. Disinflation is where prices are still increasing albeit at a slower pace. CPI is still rising

All da best to all of you 

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