Ag_Econ 1042 1st EditionExam# 1 Study Guide Lectures: 1 - 5Lecture 1 (January 20)Introduction to EconomicsWhat are the two divisions of economics? Describe them.Two divisions of economics:1. Microeconomics2. MacroeconomicsMicroeconomics:-The study of how individuals, households and small businesses make decisions when there are an unlimited amount of wants but a limited amount of resources.Macroeconomics:-The study of what an economy is doing with their money on a national, international and global level, along with how their money is doing when it comes to topics like inflation, unemployment and national productivity.Lecture 2 (January 22)What is rational behavior and what does it suggest? Rational behavior is when an individual, or household, acts in a way that has their goal in mind to achieve. It suggests: when faced with two options the item with the greatest net benefit will be chosen, that additional benefits are compared against additional costs, that people respond to incentives and that people seek opportunities to get things they want.What influencesdecisions? Opportunity costs, incentives and efficiency all play a part in decision making. Opportunity costsare based on interests and preferences, so every individual has a different look on an opportunity cost. Then are incentives are that made to influence behavior, whether it be positive or negative. Lastly, efficiency is how resources are used.How is the production possibilities frontier used?The production possibilities frontier is used to show the available output options if all resources are being used. If the frontier is linear, then resources can be transferred between the two products at a constant rate. However, if the frontier is convex that means that resources cannot be transferred between the two goods constantly. If production levels are on the frontier then production is efficient, but if it is underneath the frontier production is inefficient.Define and distinguish between absolute advantage and comparative advantage. How do specializationand trade help a country?Absolute advantage occurs when a producer can produce more goods than another with a givenamount of resources. Comparative advantage occurs when a producer can make a good at a lower opportunity cost than another producer. There is no country that has a comparative advantage in everything, but have comparative advantage in something. Comparative advantage leads to trade because if a country can produce more with the lowest opportunity cost their total amount of production will increase. With specialization and trade gains from trade can occur.Lecture 3 (January 27)Describe a competitive market and its qualities.The word market refers to the trade of certain goods and services between buyers and sellers.A competitive market is a market with: a standardized good, no transaction costs, buyers and sellers have the full information about the good and all participants are price takers. There are very few competitive markets.Why are demand and supply so important when it comes to the equilibrium?Market equilibrium occurs where the demand and supply curve intersect. Demand levels are controlled by consumers. The law of demand states that there is an inverse relationship between prices and demand. Then, supply is controlled by producers and the law of supply says that there is a linear relationship between price and quantity supplied. However, disequilibrium can occur if prices are too high or low for consumer expectations.Lecture 4 (January 29)What is the most common tools in macroeconomics? What does it do? What are ways it can be used?The most commonly used tool in macroeconomics is gross domestic product (GDP). It is the sumof the market values of final goods and services produced within a country during a set period of time, it measures the size of an economy. GDP is used to see how prices and output have changed over the year(s). There are things like the GDP deflator, nominal GDP, real GDP, GDP per capita and GDP growth rates that all give predictions as to how a countries ecomonmy is doing.Lecture 5 (February 5)What is a market basket and what is it used for?The market basket is a fixed list of goods and services in fixed quantities. It is handy for price indices, which show how much the prices of the goods and services in the market basket have changed compared to its base year or compared to another location.What is the consumer price index and what is it used to determine?The consumer price index, measured by the Bureau of Labor Statistics, keeps watch of the price change of the market basket for a typical household in The Unites States. It is used in equations to calculate inflation rate and deflating nominal variables.Describe the purchasing power parity.The purchasing power parity is a theory that states, purchasing powers in different countries should be the same when stated in a common currency. However, that rarely occurs, so they there is the purchasing power parity adjustment that recalculates the statistics to take the different price levels in different countries into