Cambridge Notes, Past Papers, Revision Questions

IGCSE Economics 0455 – The Basic Economic Problem: Production Possibility Curve

The Basic Economic Problem

Every economy faces the fundamental problem of scarcity: resources are limited while human wants are unlimited. This forces societies to make choices about what to produce, how to produce it, and for whom.

Production Possibility Curve (PPC)

The Production Possibility Curve (also called the Production Possibility Frontier, PPF) is a graphical representation that shows the maximum possible output combinations of two goods or services that an economy can achieve when all resources are fully and efficiently employed.

Suggested diagram: A typical PPC showing two goods (e.g., Cars and Computers) with a bowed‑out shape, points A, B, C on the curve and point D inside the curve.

Key Features of a PPC

Shows the trade‑off between two goods.

Illustrates the concept of scarcity and choice.

Reflects the economy’s current technology and resource endowment.

Is typically bowed outwards due to increasing opportunity costs.

Assumptions Underlying the PPC

Only two goods are considered.

All resources are fully employed and efficiently used.

Technology is constant.

Resources are fixed in quantity.

Movements on the PPC

Three types of movement are possible:

Movement	Location on PPC	Economic Interpretation	Effect on Opportunity Cost
Movement along the curve	From one point on the curve to another	Reallocation of resources between the two goods	Opportunity cost is positive and can be measured
Movement inside the curve	Point inside the frontier	Under‑utilisation of resources (unemployment, inefficiency)	No opportunity cost – resources are idle
Shift of the curve	Entire curve moves outward or inward	Change in resource quantity, quality or technology	Opportunity cost concept unchanged; the curve’s shape may alter

Significance of Movements Along the PPC

When an economy moves from point A to point B on the PPC, it must give up some amount of one good to gain more of the other. This trade‑off is the essence of opportunity cost.

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when a choice is made. On a PPC it is measured by the slope of the curve at the point of production.

\$\text{Opportunity Cost of Good X} = \frac{\Delta Y}{\Delta X}\$

Because the PPC is usually bowed outwards, the slope becomes steeper as production of Good X increases, indicating that the opportunity cost rises.

Illustrative Example

Suppose an economy can produce either Cars or Computers. The following data represent points on the PPC:

Point	Cars (units)	Computers (units)
A	0	100
B	20	80
C	40	50

Moving from A to B increases car production by 20 units but reduces computers by 20 units. The opportunity cost of each additional car in this range is:

\$\text{OC}_{\text{car}} = \frac{20\text{ computers}}{20\text{ cars}} = 1\text{ computer per car}\$

Moving from B to C, car output rises by another 20 units while computers fall by 30 units, giving:

\$\text{OC}_{\text{car}} = \frac{30\text{ computers}}{20\text{ cars}} = 1.5\text{ computers per car}\$

The increase in the ratio demonstrates the principle of increasing opportunity cost.

Key Take‑aways

The PPC visualises scarcity, choice, and efficiency.

Movement along the curve represents a trade‑off between two goods, with a measurable opportunity cost.

Opportunity cost is reflected by the slope of the PPC; a bowed‑out curve indicates rising opportunity costs.

Points inside the curve signal under‑utilisation of resources, while shifts of the curve indicate changes in resource availability or technology.

The significance of movements along a PPC and opportunity cost