9708 · 1.5
Practice and worked examples for 9708 Production possibility curves. Short previews only — attempt the full question in MarkScheme against the official scheme.
A country moves from a point inside the PPC to a point on the PPC. What has changed?
Productive efficiency improved — previously unemployed resources are now used.
Output of at least one good increases without reducing the other (or both increase).
An economy can produce two types of goods: Capital Goods and Consumer Goods. The table below shows five possible combinations of production (in thousands of units) on its PPC.
| Combination | Capital Goods (thousands) | Consumer Goods (thousands) |
|---|---|---|
| A | 0 | 100 |
| --- | --- | --- |
| B | 10 | 95 |
| C | 20 | 85 |
| D | 30 | 65 |
| E | 40 | 0 |
Calculate the opportunity cost of increasing the production of Capital Goods from 20,000 to 30,000 units.
Step 1: Identify the relevant production points. Moving from 20,000 to 30,000 Capital Goods corresponds to moving from Combination C to Combination D on the PPC.
Step 2: Calculate the gain in Capital Goods. Gain = Final Capital Goods - Initial Capital Goods Gain = 30,000 units - 20,000 units = 10,000 units
Step 3: Calculate the loss in Consumer Goods. At Combination C (20,000 Capital Goods), production of Consumer Goods is 85,000 units. At Combination D (30,000 Capital Goods), production of Consumer Goods is 65,000 units. Loss = Initial Consumer Goods - Final Consumer Goods Loss = 85,000 units - 65,000 units = 20,000 units
Step 4: State the opportunity cost. The opportunity cost is the value of the next best alternative foregone. To gain 10,000 Capital Goods, the economy must give up 20,000 Consumer Goods.
Final Answer: The opportunity cost of increasing the production of Capital Goods by 10,000 units is 20,000 units of Consumer Goods.