The significance of movements along a PPC and opportunity cost

The Basic Economic Problem

Definition (syllabus wording): The basic economic problem is that a society’s resources are finite while human wants are unlimited. Because of this scarcity every economy must answer three fundamental allocation questions:

1. What goods and services should be produced?
2. How should they be produced?
3. For whom should they be produced?

Economic Goods and Free Goods

Both concepts are required by the Cambridge IGCSE syllabus.

• Economic goods – scarce, have a price and are bought and sold. Examples: bottled water, a car, a mobile phone.
• Free goods – abundant, available without cost and have no market price. Examples: air, sunlight, seawater (in most contexts).

Factors of Production – Quantity and Quality

Four factors are recognised. Their quantity (how much of each factor is available) and quality (how productive or skilled the factor is) affect the shape and position of the PPC.

Opportunity Cost

Definition: The value of the next best alternative that is foregone when a choice is made.

The syllabus expects students to express opportunity cost in terms of the amount of one good given up to obtain an additional unit of another good.

Formula (slope of the PPC):

\[

\text{Opportunity Cost of one more unit of Good X} = \frac{\text{Units of Good Y given up}}{\text{Units of Good X gained}} = \frac{\Delta Y}{\Delta X}

\]

Because the curve is usually bowed‑out, the slope (and therefore the opportunity cost) changes at different points – this is the principle of increasing opportunity cost.

Production‑Possibility Curve (PPC)

How to Draw a PPC (step‑by‑step)

1. Choose two goods to compare (e.g., Cars and Computers).
2. Label the vertical axis with one good and the horizontal axis with the other.
3. Choose an appropriate scale for each axis (e.g., 0–100 units).
4. Plot the maximum output of each good when all resources are devoted to that good – these are the intercepts.
5. Connect the intercepts with a smooth, bowed‑out curve to show increasing opportunity cost.
6. Mark at least three points on the curve (e.g., A, B, C) and one point inside the curve (e.g., D) for illustration.

Interpreting Points on the PPC (syllabus wording)

• Points on the curve – the economy is using all its resources efficiently (full employment, no waste).
• Points under the curve – some resources are idle or under‑utilised (recession, unemployment).
• Points beyond the curve – unattainable with the current resource endowment and technology.

Movements on the PPC

Significance of Movements Along the PPC

When an economy moves from point A to point B on the PPC, it must give up a certain amount of one good to obtain more of the other. This trade‑off is the concrete illustration of opportunity cost and shows how scarce resources are allocated.

Opportunity Cost Illustrated on the PPC

Consider the data below (Cars on the vertical axis, Computers on the horizontal axis):

Moving from A to B:

\[

\text{OC of one car} = \frac{\Delta \text{Computers}}{\Delta \text{Cars}} = \frac{100-80}{20-0}= \frac{20}{20}=1\text{ computer per car}

\]

Moving from B to C:

\[

\text{OC of one car} = \frac{80-50}{40-20}= \frac{30}{20}=1.5\text{ computers per car}

\]

The increase from 1 to 1.5 computers per car demonstrates increasing opportunity cost: as more cars are produced, larger amounts of computers must be sacrificed because resources best suited to computer production are being re‑allocated.

Constant vs. Increasing Opportunity Cost (optional extension)

• Constant OC: If the PPC were a straight line, the slope would be the same everywhere – the economy gives up the same amount of one good for each additional unit of the other.
• Increasing OC (real‑world case): The PPC is bowed outwards because resources are not equally adaptable; as production of one good expands, increasingly less‑efficient resources must be used.

Practice Drawing Task (exam‑style)

Task: The table below shows the maximum possible production of two goods in an economy.

Draw a PPC, label the axes, plot the three points (A, B, C), and indicate which point lies under the curve. In a brief answer state the type of opportunity cost shown by the curve (increasing or constant) and one possible reason for an outward shift of the curve.

Marking‑scheme hint (for teachers): 1 mark for correct axes, 2 marks for accurate plotting of the three points, 1 mark for drawing a bowed‑out curve, 1 mark for correctly identifying the point under the curve, 1 mark for naming “increasing opportunity cost”, 1 mark for a valid cause of an outward shift (e.g., better technology).

Shifts of the PPC – Causes and Consequences

Key Take‑aways

• The basic economic problem (scarcity vs. unlimited wants) forces societies to make choices about what, how and for whom to produce.
• Economic goods are scarce and priced; free goods are abundant and have no price.
• Factors of production earn rent, wages, interest and profit; changes in their quantity or quality shift the PPC.
• The PPC visualises scarcity, choice, efficiency, and the trade‑offs (opportunity cost) inherent in the basic economic problem.
• Movement along the curve represents a re‑allocation of resources and has a measurable opportunity cost given by the slope (ΔY/ΔX).
• Points under the curve indicate under‑utilisation; points beyond the curve are unattainable with current resources.
• Outward shifts = economic growth; inward shifts = economic contraction. The concept of opportunity cost remains, though the slope may change.

Link to later topics: Mastering the PPC underpins later IGCSE units on market equilibrium, economic growth, price elasticity, and the analysis of trade‑offs in international trade and development.