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CHAPTER 2 SUMMARY

Scarcity, Choice, and Opportunity Cost

• A production possibilities frontier shows the range of possible production choices for two products and the opportunity cost of each production choice.

• Budget constraint shows how two factors, income and the price of goods, set a limit on people's consumption choices.

The Circular Flow Model

• Households and other buyers purchase goods and services from businesses in the product market.

• Businesses purchase resources (the factors of production) from households in the factor market.

• The circular flow model shows two additional flows, the flow of resources and products on an outer circle, and the flow of money payments for resources and products on the inner circle.

Demand

• Demand is the amount of a product people are willing and able to buy at a series of prices, and is illustrated with a downward sloping demand curve.

• The demand for products often changes in response to a change in one or more of the determinants of demand.

• The price elasticity of demand measures the impact of a price change on the quantity demanded of a product; the demand for a product can be price elastic or price inelastic.

Supply

• Supply is the amount of a product producers are willing and able to sell at a series of prices, and is illustrated with an upward sloping supply curve.

• The supply of products often changes in response to a change in one or more of the determinants of supply.

• The price elasticity of supply measures the impact of a price change on the quantity supplied of a product; the supply of a product can be price elastic or price inelastic.

Market Equilibrium

• At the market equilibrium for a product, the demand curve and the supply curve intersect, thus establishing a market price and quantity for the product.

• The government can intervene in markets to set a price ceiling, which is a maximum price for a product, or a price floor, which is a minimum price for a product.

• The price system coordinates most production and consumption decisions by sending signals to market participants about how to use their scarce resources.

 
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