Worked example 1

A country moves from a point inside the PPC to a point on the PPC. What has changed?

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Productive efficiency improved — previously unemployed resources are now used.

Output of at least one good increases without reducing the other (or both increase).

Worked example 2

An economy can produce consumer goods and capital goods. The table below shows some of its production possibilities.

Calculate the opportunity cost of increasing the production of capital goods from 40 units to 60 units.

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Step 1: Identify the change. The economy moves from combination C to combination D to increase capital goods production from 40 to 60 units.

Step 2: Identify what is given up and what is gained.

Given up: Production of consumer goods falls from 70 units to 40 units. The loss is 70 - 40 = 30 consumer goods.
Gained: Production of capital goods increases from 40 units to 60 units. The gain is 60 - 40 = 20 capital goods.

Step 3: Apply the opportunity cost formula. Opportunity Cost = (What is given up) / (What is gained)

Step 4: Calculate the final answer. Opportunity Cost = 30 consumer goods / 20 capital goods = 1.5 consumer goods.

Final Answer: The opportunity cost of producing one additional capital good (when moving from C to D) is 1.5 consumer goods.