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

This guide covers sections 1.5 and 1.6 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 1 is AS Level content, and the syllabus says AS Level content is assumed knowledge for A Level Papers 3 and 4. Every firm, country and figure below is invented for illustration. Money is in currency units (cu).

Use the course hub for the whole syllabus and the printable checklist to tick off outcomes. When you finish, use the revision notes and the practice questions, and take a free 10-minute diagnostic to find weak spots. Opportunity cost itself is in the scarcity and methods guide.

What you must be able to do

Syllabus	Outcome
1.5.1	Explain the nature and meaning of a production possibility curve (PPC)
1.5.2	Explain why a PPC is straight (constant opportunity cost) or bowed out (increasing opportunity cost)
1.5.3	Give the causes and consequences of shifts in a PPC
1.5.4	Explain the significance of a position on, inside or outside a PPC
1.6.1	Define free goods and private goods (economic goods)
1.6.2	Define public goods
1.6.3	Define merit goods: under-consumption as a result of imperfect information
1.6.4	Define demerit goods: over-consumption as a result of imperfect information

1.5.1 What a PPC shows

A production possibility curve (PPC) plots the largest output pairs of two goods (or two types of goods, such as consumer and capital goods) that an economy can make in a period, if every resource is used fully and efficiently and technology stays fixed. Three words in that definition matter: maximum, all resources, and given technology.

A PPC is a model that reduces an economy to two goods. Scarcity appears because the curve is a boundary: you cannot have more of both. Choice appears because you must pick a point on it. Opportunity cost appears because moving along it means giving up one good to get more of the other.

Table for Country A, an invented economy, producing food and manufactured goods in a year:

Point	Food (million tonnes)	Manufactures (million units)
A	0	60
B	10	58
C	20	52
D	30	40
E	40	22
F	50	0

Plot food on the horizontal axis and manufactures on the vertical axis. Joining the points gives a curve that starts at 60 on the vertical axis and falls to 50 on the horizontal axis, steepening as it goes.

1.5.2 Shape: constant and increasing opportunity costs

The opportunity cost of one more tonne of food is the number of manufactured units given up. Between points, the table gives:

Move	Manufactures lost	Opportunity cost per tonne of food
A to B	2	0.2
B to C	6	0.6
C to D	12	1.2
D to E	18	1.8
E to F	22	2.2

Each extra tonne of food costs more units of manufactures than the last. That is increasing opportunity cost, and it gives a PPC that bows outwards from the origin (concave to the origin). The slope of the curve at any point measures the opportunity cost of the good on the horizontal axis.

Why the cost rises. Resources are not equally suited to every use. To make the first tonnes of food, the economy moves land and workers that are best at farming and poor at making goods, so little output is lost. To make the last tonnes, it must move land and workers that are good at manufacturing and poor at farming, so a great deal is lost for each tonne gained. This is imperfect mobility or specialisation of factors.

Constant opportunity cost. A PPC is a straight line if resources are equally productive in both uses, so each unit of one good always costs the same amount of the other.

Worked example. An island economy, invented, can use all its labour to catch 120 tonnes of fish or to pick 60 tonnes of coconuts, and the trade-off is constant.

Opportunity cost of 1 tonne of coconuts = 120 / 60 = 2 tonnes of fish
Opportunity cost of 1 tonne of fish     = 60 / 120 = 0.5 tonnes of coconuts
Choose 25 tonnes of coconuts: fish given up = 25 x 2 = 50
Fish still caught = 120 - 50 = 70 tonnes

Constant cost is rare in practice. Do not draw a straight line when resources are not equally suited to both uses.

1.5.3 Shifts in a PPC

A shift of the whole curve means a change in the economy’s productive capacity. A movement along the curve is only a change in the mix of output.

Outward shift (potential growth)

• more resources: discovery of mineral deposits, growth in the labour force through higher birth rates or immigration, investment in capital;
• better quality resources: education and training, healthcare that improves productivity;
• improved technology and organisation.

Inward shift (fall in capacity)

• destruction of capital or land through war or natural disaster;
• loss of workers through emigration or disease;
• depletion of non-renewable resources.

The shift can be parallel (capacity rises in both goods) or biased (rises in only one). If a new farming technique raises only food capacity, the curve pivots outwards on the food axis and the manufactures intercept stays put.

Worked example. Country A’s capacity rises 20% in both goods.

New food maximum         = 50 x 1.2 = 60 million tonnes
New manufactures maximum = 60 x 1.2 = 72 million units
Point D (30, 40) becomes (36, 48) on the new curve

Instead, suppose a new crop raises only food capacity, from 50 to 65 million tonnes. Food capacity rises by (65 - 50) / 50 x 100 = 30%, and the manufactures maximum stays 60.

Consequences. An outward shift lets the economy raise output of both goods, which is potential economic growth, and can support higher living standards. It does not guarantee it: output only rises if the economy moves to a point on the new curve, which is actual growth. Choosing more capital goods now shifts the curve outwards faster later, but costs consumer goods today, so there is a trade-off between present and future consumption. An inward shift forces less output of at least one good. Evaluate by asking whether the extra capacity is used and shared fairly.

1.5.4 Significance of a position

Position	Meaning
On the curve	Resources fully employed and productively efficient. More of one good costs some of the other
Inside the curve	Unemployed or poorly used resources, or inefficiency. The economy could produce more of one or both goods at no opportunity cost
Outside the curve	Cannot be reached with today’s resources and technology

Worked example. In a given year Country A makes 20 million tonnes of food and 40 million units of manufactures. At 20 food the curve gives 52 manufactures.

Spare capacity in manufactures = 52 - 40 = 12 million units
Gain as % of current output    = 12 / 40 x 100 = 30%

Moving onto the curve at point C gains 12 units of manufactures with no loss of food. Alternatively, at 40 manufactures the curve gives 30 food, so the economy could gain 10 food. A point at 40 food and 30 manufactures lies outside the curve, because at 40 food the maximum manufactures is only 22.

A position on the curve does not say whether it is the best point. Which point is best depends on what people want, which the PPC alone does not show. A PPC shows productive efficiency, not allocative efficiency.

1.6.1 Free goods and private (economic) goods

A free good has no opportunity cost of supply: there is so much of it that using more does not mean giving up something else, and no one needs to pay to get it. A private good or economic good is scarce, so it uses resources, has an opportunity cost and normally has a price. Private goods are rivalrous (one person’s use leaves less for others) and excludable (a seller can stop non-payers from using them).

A good can be free in one setting and scarce in another. Stream water collected by a village with plentiful supply can be free. The same water bottled, treated and delivered to a dry town is an economic good, because resources are used up.

1.6.2 Public goods

A public good is non-excludable and non-rivalrous.

• Non-excludable: once provided, no one can be stopped from benefiting, including those who do not pay.
• Non-rivalrous: one person’s use does not reduce the amount available to others.

Since non-payers cannot be shut out, people are tempted to be free riders, who enjoy the good without paying. If everyone reasons this way, no one pays and private firms cannot earn revenue, so the market fails to provide the good, or provides too little. Governments usually provide public goods and pay for them through taxation.

Worked example. A town has 100 households. Each values new street lighting at 300 cu. It costs 20,000 cu.

Total benefit = 100 x 300 = 30,000 cu
Net benefit   = 30,000 - 20,000 = 10,000 cu
Tax per household for full funding = 20,000 / 100 = 200 cu
Net gain per household = 300 - 200 = 100 cu

The lighting is worth providing, but if payment is voluntary each household can hope others pay, so little or none is funded. A compulsory tax solves this.

1.6.3 Merit goods

A merit good is one that is under-consumed in a free market, because consumers do not fully appreciate its benefits, as a result of imperfect information. The social benefit (to the individual and everyone else) is greater than the benefit consumers think they will receive. Examples are education and vaccination. Merit goods often create benefits for others (positive externalities).

Worked example. In an invented market for dental check-ups, private demand is P = 80 - 2Q, the marginal social benefit is P = 110 - 2Q, and supply (marginal cost) is P = 20 + Q.

Market:  80 - 2Q = 20 + Q  ->  Q = 20, P = 40
Optimum: 110 - 2Q = 20 + Q ->  Q = 30, P = 50
Under-consumption = 30 - 20 = 10 units, or 50% of market output

On a diagram, the marginal social benefit curve lies above the demand curve by 30 cu at every quantity. The market sets output where demand meets supply (quantity 20). The social optimum is where the higher curve meets supply (quantity 30). The gap of 10 units is the under-consumption.

1.6.4 Demerit goods

A demerit good is over-consumed in a free market because consumers do not fully appreciate its harm, as a result of imperfect information. The social harm is greater than the harm consumers believe they face. Examples are tobacco and alcohol. Demerit goods often create costs for others (negative externalities).

Worked example. For an invented harmful product, private demand is P = 100 - 2Q, the marginal social benefit (after counting the harm) is P = 70 - 2Q, and supply is P = 10 + Q.

Market:  100 - 2Q = 10 + Q -> Q = 30, P = 40
Optimum:  70 - 2Q = 10 + Q -> Q = 20, P = 30
Over-consumption = 30 - 20 = 10 units, or 50% of the optimum

Here the marginal social benefit curve lies below the demand curve, so the optimum is left of the market output.

Common errors

• Defining a PPC without “maximum”, “fully and efficiently” or “given technology”.
• Showing a point inside the curve as “efficient”. It is inefficient or has unemployed resources.
• Confusing a shift with a movement. Moving along the curve changes the mix of output, not capacity.
• Calling an outward shift “growth” without saying it is potential growth.
• Calling a public good “a good provided by the government”. Public goods are defined by non-excludability and non-rivalry, not by who provides them. Some goods the state provides, such as a state school place, are private goods.
• Treating merit and demerit goods as the same as “good” and “bad”. The syllabus defines them by imperfect information leading to under- or over-consumption.

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 Production possibility curves and 1.6 Classification of goods and services.