Cambridge A Level Economics: Production possibility curves and the classification of goods (9708) – Revision Notes

These notes condense sections 1.5 and 1.6 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. They are AS Level content (topic 1), assumed knowledge for A Level Papers 3 and 4. Full explanations are in the study guide. Test yourself with the practice questions, the free diagnostics, the course hub and the printable checklist. All figures here are invented.

Definitions to learn word for word

Term	Definition
Production possibility curve (PPC)	The largest output pairs of two goods an economy can make in a period when every resource is fully and efficiently used and technology is fixed
Opportunity cost	The next best alternative given up
Free good	A good with no opportunity cost of supply: not scarce, no price
Private (economic) good	A scarce good with an opportunity cost, normally priced, that is rivalrous and excludable
Public good	A good that is non-excludable and non-rivalrous
Free rider	Someone who benefits from a good without paying for it
Merit good	A good under-consumed in a free market because consumers do not fully appreciate its benefits (imperfect information)
Demerit good	A good over-consumed in a free market because consumers do not fully appreciate its harm (imperfect information)

1.5.1 Meaning of a PPC

• A model of scarcity, choice and opportunity cost for two goods.
• Axes: one good on each axis, in units per period.
• Points on the curve: maximum output, no waste.
• Moving along the curve: gain of one good means loss of the other.
• Assumptions: fixed resources, fixed technology, full and efficient use.

1.5.2 Shape: constant and increasing opportunity cost

Feature	Straight PPC	Bowed-out PPC (concave to the origin)
Opportunity cost	Constant	Increasing
Reason	Resources equally good at both uses	Resources not equally suited to both uses
Slope	Same everywhere	Gets steeper as you move along
Realism	Rare	Typical

Method: opportunity cost from a table.

1. Find the change in the good on the vertical axis (the loss).
2. Find the change in the good on the horizontal axis (the gain).
3. Opportunity cost of the gained good = loss divided by gain.
4. Write the units.

Worked reminder. Region Y, invented, with capital goods and consumer goods:

Capital goods	Consumer goods	Move	Consumer goods lost	Opportunity cost per capital good
0	90
10	84	0 to 10	6	0.6
20	72	10 to 20	12	1.2
30	54	20 to 30	18	1.8
40	30	30 to 40	24	2.4
50	0	40 to 50	30	3.0

The cost rises with every move, so the curve bows outwards. A straight line would give the same figure each time.

Why costs rise: factors are specialised, so the first units of the new good use resources suited to it, and later units draw in resources poorly suited to it.

1.5.3 Shifts

Direction	Causes
Outward	More resources (discoveries, labour force growth, capital investment); better quality (education, training, health); technology and organisation
Inward	War or disaster destroying capital; emigration or illness reducing labour; depleted resources
Pivot	Capacity changes for only one good

Memory aid: a shift needs a change in the quantity or quality of resources or technology. A change in the choice of product mix is a movement.

Consequences:

• Outward shift: potential growth, room for more of both goods, possible rise in living standards.
• Actual growth needs the economy to move to the new curve.
• Choosing more capital goods now costs consumer goods today but can raise future capacity.
• Inward shift: lower potential output and lower living standards unless offset.

Worked reminder. Region Y raises capital capacity from 50 to 56 and consumer capacity from 90 to 99.

Capital:  (56 - 50) / 50 x 100 = 12%
Consumer: (99 - 90) / 90 x 100 = 10%

The shift is slightly biased towards capital goods. The new curve lies outside the old one at both intercepts.

1.5.4 Position

Position	Interpretation	Costs and benefits
On the curve	Full employment, productive efficiency	Trade-off between goods
Inside the curve	Unemployment or inefficiency	Both goods can rise with no opportunity cost
Outside the curve	Unattainable	Needs a shift first

Worked reminder. Region Y makes 20 capital goods and 60 consumer goods. The curve at 20 capital goods gives 72.

Spare capacity = 72 - 60 = 12 consumer goods
12 / 72 x 100 = 16.7% of the maximum

Moving up to the curve gains 12 consumer goods with no loss of capital goods.

A PPC cannot show the best point, because that depends on preferences. It shows productive, not allocative, efficiency.

1.6 Classification of goods

Good	Excludable?	Rivalrous?	Pricing in a free market	Typical outcome
Free	Not needed	No scarcity	Zero	No opportunity cost
Private (economic)	Yes	Yes	Priced	Market provides
Public	No	No	Cannot be priced	Market fails to provide, free rider problem
Merit	Yes (usually)	Yes (usually)	Priced	Under-consumed, imperfect information
Demerit	Yes (usually)	Yes (usually)	Priced	Over-consumed, imperfect information

Free vs economic. Ask whether using more means giving something up. If not, it is free. The same item can be free in one place and economic in another.

Public good chain of reasoning.

1. Non-excludable, so non-payers cannot be stopped from benefiting.
2. Households wait for others to pay (free riding).
3. The firm cannot earn revenue.
4. The market provides none, or too little.
5. Government provides it, funded by tax.

Worked reminder. A village of 60 households values a flood barrier at 250 cu each (total 15,000). It costs 12,000.

Net benefit = 15,000 - 12,000 = 3,000 cu
Tax per household = 12,000 / 60 = 200 cu, leaving a net gain of 50 cu each

Merit and demerit chain. Consumers lack full information, so they misjudge benefit or harm. The price they are willing to pay differs from the true social value. Consumption is too low for merit goods and too high for demerit goods.

	Merit	Demerit
Demand curve (private view) vs marginal social benefit	Below	Above
Market output vs optimum	Too low	Too high
Examples	Education, vaccination	Tobacco, alcohol

Worked reminder (merit, invented). Private demand P = 40 - 2Q, marginal social benefit P = 52 - 2Q, supply P = 4 + 2Q.

Market:  40 - 2Q = 4 + 2Q -> Q = 9, P = 22
Optimum: 52 - 2Q = 4 + 2Q -> Q = 12, P = 28
Under-consumption = 12 - 9 = 3 units

Must-know distinctions

• Shift vs movement: capacity changes versus mix changes.
• On the curve vs inside: efficient versus wasteful.
• Potential growth vs actual growth.
• Public good vs good provided by the state. A state school place can be rivalrous and excludable, so it is not a public good.
• Non-excludable vs non-rivalrous. A good needs both to be a public good.
• Merit and demerit are about imperfect information and the gap between private and social value, not about opinions of what is good or bad.

Quick self-test

1. Define a production possibility curve.
2. A farm can produce 90 tonnes of oats or 30 tonnes of barley with constant costs. State the opportunity cost of one tonne of barley.
3. State two reasons a PPC bows outwards.
4. Name two causes of an outward shift and one of an inward shift.
5. An economy’s PPC shifts outward by 8% for both goods. Its maximum output of one good was 250 units. Calculate the new maximum.
6. An economy produces inside its PPC. State two possible reasons.
7. State the two characteristics of a public good.
8. Explain the free rider problem in one sentence.
9. Why is tap water in a dry region an economic good and not a free good?
10. Why are vaccinations under-consumed in a free market?
11. State the link between imperfect information and demerit goods.

Answers

1. The largest output pairs of two goods producible in a period with every resource fully and efficiently used and technology fixed.
2. 90 / 30 = 3 tonnes of oats.
3. Resources are not equally suited to both uses, so more is lost per unit as you move resources over. Factors are specialised and imperfectly mobile.
4. Outward: new mineral discovery, investment in capital, better technology. Inward: war destroying capital.
5. 250 x 1.08 = 270 units.
6. Unemployment of labour; inefficient use of resources, such as poor organisation or a recession.
7. Non-excludable and non-rivalrous.
8. A free rider benefits from a good without paying, so people hold back from paying and the market under-supplies it.
9. Water there is scarce and uses resources to supply, so it has an opportunity cost and a price.
10. People underestimate the benefit to themselves and others, so private demand is below marginal social benefit.
11. Consumers underestimate the harm, so they consume more than the socially best amount.

Where marks are usually lost

• Defining a PPC without “maximum” or “given technology”.
• Writing opportunity cost as a raw number of units with no stated good, or dividing the wrong way round.
• Drawing a PPC that is straight when the question calls for increasing cost, or leaving it unlabelled.
• Drawing a move along the curve in an answer about a change in capacity.
• Describing an inward shift without naming a cause that changes capacity.
• Saying that a point inside the PPC is inefficient but not naming unemployed or underused resources.
• Calling a public good “free” or “government-provided” without non-excludability and non-rivalry.
• Treating merit and demerit goods as moral labels and forgetting imperfect information.
• Stopping at the identification of under-consumption without explaining why the market gets it wrong.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge Assessment International Education): sections 1.5 and 1.6.