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Microeconomics, like macroeconomics, is a fundamental method for analyzing the economy as a system. It treats households and firms interacting through individual markets as irreducible elements of the economy, given scarcity and government regulation. A market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It combines these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time.

Such analysis includes the theory of supply and demand. It also examines market structures, such as perfect competition and monopoly for implications as to behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that relations in other markets remain unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium.

Here economists distinguish between Production theory, Opportunity cost, Economic efficiency, and Production-possibility frontier.

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defense, small-pox vaccinations, etc.) or private goods (new computers, bananas, etc.), and "guns" vs. "butter".

Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice.". The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit.

Inputs used in the production process include such primary factors of production as labour services, capital (durable produced goods used in production, such as an existing factory), and land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.

Economic efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely-accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without making someone else worse off.



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