Cambridge IGCSE Economics: Opportunity cost and production possibility curves (0455) – Revision Notes

These notes condense sections 1.3 and 1.4 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 (opportunity cost and production possibility curves). For full explanations and longer worked examples, use the study guide. Test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist, the earlier unit on scarcity and the factors of production and the free diagnostics. All names and figures are invented.

1.3 Opportunity cost

Key definitions

Term	Definition
Scarcity	Limited resources set against unlimited wants
Choice	Selecting one use of resources, which means rejecting others
Opportunity cost	The value of the best option passed up by a choice
Production possibility curve (PPC)	A curve showing the largest amounts of two goods an economy can make together when resources are fully and efficiently used and technology is fixed
Economic growth	A rise in the economy’s capacity to produce (potential output)

Method: finding an opportunity cost

1. List the options and rank them.
2. Mark the one chosen.
3. The opportunity cost is the next best one only.
4. Say what was lost (the benefit), not just the price.

Reminder. A shop worker can spend a free day on a trip (value 12), a course (value 9) or a rest (value 5). She takes the trip. Opportunity cost = the course, valued at 9. The gap between best and next best is 12 − 9 = 3, but the opportunity cost is the course, not 3.

Who decides, and how opportunity cost matters

Decision maker	Typical choice	Opportunity cost
Consumer	Which goods to buy with limited income	The next best good or saving
Worker	Job A or B; work or leisure; work or study	Pay, leisure or experience given up
Producer	Which product, location or inputs	Profit from the next best use of resources
Government	Health, education, defence, transport, tax levels	Services or tax cuts forgone

Chain of reasoning (government). Budget is limited, so more on one service means less on another. This can mean longer waiting lists or fewer schools. The government should compare benefits across the options.

Chain of reasoning (worker). A higher wage makes an hour of leisure more costly in terms of income given up. Some workers therefore work longer hours. Others value time more highly and choose leisure.

Evaluation points. Non-money benefits are hard to value. Information is imperfect. Different people rank options differently. The opportunity cost of a choice may change over time.

1.4 Production possibility curve diagrams

Drawing a PPC

• Vertical axis: good A. Horizontal axis: good B. Label both.
• Plot combinations and join them with a smooth curve from one axis to the other.
• Mark the curve (PPC), and label points on it, under it and beyond it.

Sketch in words: a curve starts on the vertical axis, bows outward (concave to the origin) and ends on the horizontal axis.

Interpreting positions

Position	Meaning
On the PPC	Full employment and efficient use of resources: maximum output
Under the PPC	Unemployed or inefficiently used resources: more of one good possible without losing the other
Beyond the PPC	Not attainable with current resources and technology

Reminder. A small economy can produce at most 50 units of bread when it makes 30 units of tools. It produces 42 units of bread and 30 of tools.

• Shortfall = 50 − 42 = 8 units of bread.
• As a percentage of potential: 8 / 50 × 100 = 16%.
• It can reach the curve by using idle resources, at no opportunity cost.

Shape and opportunity cost

Shape	Opportunity cost	Reason
Straight line	Constant	Resources suit both goods equally
Bowed outward	Increasing	Resources suit the goods unequally

Method: opportunity cost of a movement.

1. Read the two points.
2. Find the change in the good that is gained and the change in the good that is lost.
3. Divide: good lost / good gained (the opportunity cost of one unit gained).
4. Name both goods in the answer.

Reminder. A straight PPC runs from 60 units of cloth to 30 units of tools. Opportunity cost of 1 tool = 60 / 30 = 2 cloth. Opportunity cost of 1 cloth = 30 / 60 = 0.5 tools.

A movement along the PPC shows a change in the mix of goods. Nothing about the economy’s capacity has changed.

Shifts in the PPC

Shift	Meaning	Examples of causes
Outward (both axes)	Growth in capacity for both goods	Investment in capital, better education, new technology, more workers, new land
Outward (on one axis only)	Growth in capacity for one good	New technique or resource used for one good only
Inward	Fall in capacity	War, disaster, resource depletion, loss of workers

Reminder. Maximum output of good A rises from 40 to 45 units. Growth = (45 − 40) / 40 × 100 = 12.5%. Maximum output of good B rises from 60 to 66. Growth = (66 − 60) / 60 × 100 = 10%. These are different percentages, so the two axes do not grow by the same proportion.

Why the curve bows outward

Moving from good A to good B first uses the resources best suited to B. As output of B rises, resources that are better at A must switch, so each extra unit of B costs more units of A. A short table shows it for an invented economy making cloth and tools.

Tools gained	Cloth lost	Cloth lost per tool
0 to 6	3	0.5
6 to 12	9	1.5
12 to 18	24	4.0

Actual and potential growth

Type	Diagram	Meaning
Actual growth	Move from under the PPC to the PPC	Idle resources used
Potential growth	PPC shifts outward	Capacity increases

Consequences of growth

• Benefits: more output per person is possible, higher incomes and tax revenue, better health and education become affordable.
• Costs: pollution, resource depletion, more unequal incomes, and investing now can mean less consumption now.
• Evaluation: growth in potential does not guarantee that resources are used, or that the extra output reaches the people who need it.

Must-know distinctions

Pair	Difference
Money cost and opportunity cost	The price paid versus the benefit of the best alternative given up
Movement along and shift of a PPC	A change of mix versus a change of capacity
Actual and potential growth	Using idle resources versus increasing capacity
Under and beyond the PPC	Inefficient but possible versus impossible
Constant and increasing opportunity cost	Straight line versus bowed outward

Quick self-test

1. Define opportunity cost.
2. Dina can buy a coat (30), boots (26) or a bag (22) with her money and buys the coat. State her opportunity cost.
3. A worker gives up a job paying 1,800 a month to study full-time for 10 months. Calculate the earnings forgone.
4. A farmer’s field would earn 9,000 growing barley or 7,500 growing oats. What is the opportunity cost of growing barley?
5. A government has money for either a 40-unit hospital or two 20-unit schools. Calculate the opportunity cost of the hospital in schools.
6. State what a point under a PPC shows.
7. A PPC is a straight line between 80 units of good X and 40 units of good Y. State the opportunity cost of one unit of Y in X, and say what kind of opportunity cost it shows.
8. Moving along a PPC raises good M from 10 to 14 units and lowers good N from 90 to 78. Calculate the opportunity cost of one unit of M.
9. Maximum output rises from 200 to 230. Calculate the percentage growth.
10. State one cause of an inward shift of a PPC and one cause of an outward shift.

Answers

1. The value of the best option passed up by making a choice.
2. The boots (valued at 26).
3. 1,800 × 10 = 18,000.
4. The 7,500 from oats, the next best use.
5. 40 / 20 = 2 schools.
6. Unemployed or inefficiently used resources: the economy could produce more of at least one good.
7. 80 / 40 = 2 units of X per unit of Y. It is constant opportunity cost.
8. Gained 14 − 10 = 4 of M. Lost 90 − 78 = 12 of N. 12 / 4 = 3 units of N per unit of M.
9. (230 − 200) / 200 × 100 = 15%.
10. Inward: a flood destroying farmland (or war, or loss of workers). Outward: investment in machinery (or training, or new technology).

Where marks are usually lost

• Naming the money price instead of the next best alternative.
• Giving two or more alternatives as the opportunity cost.
• Reversing the division, so the opportunity cost of the wrong good is calculated.
• Leaving out units, or naming only one of the two goods.
• Drawing a PPC that is straight when the question describes increasing cost, or without labelled axes.
• Describing a movement along the curve as economic growth.
• Placing the new curve inside the old one when showing growth.
• Giving a list of causes of growth with no link to capacity, for example “technology” with no statement of what it changes.
• Evaluation that says “it depends” without saying on what.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 1.3 Opportunity cost and 1.4 Production possibility curve (PPC) diagrams.