Editing Economics (section)

=== Production, cost, and efficiency ===
{{Main|Production (economics)|Opportunity cost|Economic efficiency|Production–possibility frontier}}
[[File:Production Possibilities Frontier Curve.svg|thumb|An example [[production–possibility frontier]] with illustrative points marked]]
In microeconomics, [[Production (economics)|production]] is the conversion of [[factor of production|inputs]] into [[Output (economics)|outputs]]. It is an economic process that uses inputs to create a [[good (economics)|commodity]] or a service for [[trade|exchange]] or direct use. Production is a [[Stock and flow|flow]] and thus a rate of output per period of time. Distinctions include such production alternatives as for [[Consumption (economics)|consumption]] (food, haircuts, etc.) vs. [[Investment#In economics or macroeconomics|investment goods]] (new tractors, buildings, roads, etc.), [[Public good (economics)|public good]]s (national defence, smallpox vaccinations, etc.) or [[private good]]s, and [[Guns versus butter model|"guns" vs "butter"]].

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

[[Economic efficiency]] measures 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. 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.

The [[production–possibility frontier]] (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case, an [[economy]] can produce just two goods (say "guns" and "butter"). The PPF is a table or graph (as at the right) that shows the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows [[Potential output|potential total output]] for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.

[[Scarcity]] is represented in the figure by people being willing but unable in the aggregate to consume ''beyond the PPF'' (such as at ''X'') and by the negative slope of the curve.<ref>{{cite encyclopedia|last=Montani |first=Guido |date=1987 |dictionary=The New Palgrave: A Dictionary of Economics |edition= |editor-first1=John |editor-last1=Eatwell |editor-first2=Murray |editor-last2=Milgate |editor-first3=Peter |editor-last3=Newman |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde1987_X001949 |doi=10.1057/9780230226203.3485 |title=The New Palgrave Dictionary of Economics |isbn=978-0-333-78676-5 |chapter=Scarcity |pages=1–4 |access-date=4 October 2017 |archive-date=5 October 2017 |archive-url=https://web.archive.org/web/20171005051007/http://www.dictionaryofeconomics.com/article?id=pde1987_X001949 |url-status=live }}</ref> If production of one good ''increases'' along the curve, production of the other good ''decreases'', an [[inverse relationship]]. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter.

The [[slope]] of the curve at a point on it gives the [[trade-off#Examples from common life|trade-off]] between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a ''real opportunity cost''. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. ''Along the PPF'', scarcity implies that choosing ''more'' of one good in the aggregate entails doing with ''less'' of the other good. Still, in a [[market economy]], movement along the curve may indicate that the [[utility|choice]] of the increased output is anticipated to be worth the cost to the agents.

By construction, each point on the curve shows ''[[productive efficiency]]'' in maximizing output for given total inputs. A point ''inside'' the curve (as at ''A''), is feasible but represents ''production inefficiency'' (wasteful use of inputs), in that output of ''one or both goods'' could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high [[unemployment]] during a [[business cycle|business-cycle]] [[recession]] or economic organisation of a country that discourages full use of resources. Being on the curve might still not fully satisfy [[allocative efficiency]] (also called [[Pareto efficiency]]) if it does not produce a mix of goods that consumers prefer over other points.

Much [[applied economics]] in [[public policy]] is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organise society for the most efficient use of resources has been described as the "essence of economics", where the subject "makes its unique contribution."{{sfnp|Samuelson|Nordhaus|2010|loc= ch. 1, p. 5 (quotation) and sect. C, "The Production-Possibility Frontier", pp. 9–15; ch. 2, "Efficiency" sect.; ch. 8, sect. D, "The Concept of Efficiency}}