Econ 2023 1st EditionExam # 2 Study Guide Lectures: 9-14Lecture 9 (February 12)-Start of trade with the gains, terms, and barriers of trade.-What is trade? : an extension of market exchange across national borders-Compare absolute and comparative advantage: -Absolute advantage: a. Absolute advantage: “In economies, the principle of absolute advantage refers to the ability of a party to produce more number of a good product or service than competitors for higher opportunity costs…-Comparative advantage: is based on the relative opportunity cost of production across potential trade partners.-Recall: the opportunity cost of an activity is the highest valued alternative forgone. Divergent opportunity costs underlie comparative advantage to form the economic basis for trade. Lower opportunity cost-What is the law of comparative advantage? : Law of comparative advantage: the key to the law of comparative advantage is opportunity cost. The Law is the guiding principle of trade or exchange, and of international trade in particular. If nations have different opportunity costs of production, then voluntary trade among nations will benefit all trading nations if each specializes in the production of the good in which it has the lower opportunity cost.- Major implications: advanced economies and developing counties can enjoy a symbiotic relationship through trade. A technologically advanced country is likely to forego a great deal of production and incur a relatively high opportunity cost to produce some goods, while a less advanced nation can likely produce the same good at a relatively low cost…- What are some gains from trade and how to they enhance the market? : Refers to net benefits to agents from allowing an increase in voluntary trading with each other. In technical terms, it is the increase of consumer surplus producer surplus from trade. Therefore well-being is enhanced. -Production possibilities: the alternative combinations of goods and services that could be produced by an economy within a given period of tie given the available resources and technology.- Consumption possibilities: the alternative combinations of goods and services that could be consumed by an economy …-Autarky: an economy that does not trade with other economies has identical production and consumption possibilities. Trading enhances the consumption possibilities available to people in the trading nations.- What are terms to trade? : The quantity of goods and services that a country exports to pay forits imports of goods and services.-What are barriers to trade and examples of them? Tariffs - More commonly known as “duties” (think of “duty free shops”)-Taxed on Imports: ( and occasionally on outputs)-Two types: Specific tariff: a fixed amount of money per item. Ad valorem tariff: a percentage of an item’s value.-Tariffs indirectly restrict trade by raising import prices, hence reducing their quantities demanded. -Tariffs have three primary functions:-To serve as a source of revenue: historically, tariffs were a major source of income for governments.-To protect domestic industries.-To remedy trade “distortions”: this is a punitive function undertaken to retaliate against another country’s “unfair” trade practices.Lecture 10 (February 10) -Beginning of consumer choice looking at the demand side and what it all entails.-What is Utility and the examples of utility? : Satisfaction, happiness, well-being, enjoyment. -Total utility--"The overall amount of satisfaction achieved by a consumer due to the purchase and use of a particular item or service." It is the aggregation of the utility received from each unit of a good consumed.-Marginal utility--"In economics, the marginal utility of a good or service is the gain from an increase, or loss from a decrease, in the consumption of that good or service." I.e., marginal utility (MU) is the change in total utility (TU) associated with a change in the quantity (Q) of a good consumed--MU = ΔTU/ΔQ.-Law of Diminishing Marginal Utility: (beyond same point) additional units of consumption give less additional utility. "A law of economics stating that as a person increases consumption of a product - while keeping consumption of otherproducts constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product."-Goal of consumers: maximize utility-What is a budget constraint? : B= (P1)(Q1) + (P2)(Q2)  income (B) prices of goods.-Budget constraint--"A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income."-Tell of the effect of price change and the effects that follow: The effect of a price change on quantity demanded--As the price of a good are service changes, there are two reason why the quantity demanded changes in response. One reason is the substitution effect, the second is the income effect. In general, these two effects reinforce each other and together explain why demand curves are downward sloping.- Substitution effect--When the price of a good changes, it becomes either relatively cheaper (if its price decreases) or relatively more expensive (if its price increases) compared to alternative (or substitute) goods that are available to the demander. If the good's price falls, it becomes a better value and some people will but more of it and less of something else (i.e., they substitute the relatively cheaper good whose price has fallen for other goods whose prices have not changed). If the good's price rises, it becomes a worse value--some people will therefore switch to other goods whose prices have not changed (i.e., they substitute away from the good that is now more expensive to other goods that are relatively cheaper).-Income effect--If the price of a good changes, the purchasing power of demanders changes (i.e., their choice set changes because the price change causes the budget constraint to change). Though a demander's actual income has not change, the change in purchasing power associated with price changes has an effect similar to a change in income.-What is the backward-bending labor supply curve? : A labor supply curve that is positively-sloped for relatively small quantities of labor and negatively-sloped for relatively large quantitiesof labor. In other words, workers supply larger quantities of labor in response to a higher wage when the wage is relatively