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

This guide teaches sections 1.3 and 1.4 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026: opportunity cost (1.3.1 and 1.3.2) and production possibility curve diagrams (1.4.1 to 1.4.4). All countries, firms and figures below are made up for practice and are not real data.

Related pages: revision notes for this unit, practice questions for this unit, the earlier unit on scarcity and the factors of production, the wider basic economic problem guide, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Outcomes this guide teaches

Section	What you must be able to do
1.3.1	Define opportunity cost and give examples in different contexts
1.3.2	Show how opportunity cost influences decisions by consumers, workers, producers and governments allocating resources
1.4.1	Define a production possibility curve (PPC); draw and interpret appropriate diagrams
1.4.2	Explain the significance of production points under, on and beyond a PPC
1.4.3	Explain movements along a PPC and opportunity cost
1.4.4	Explain the causes and consequences of shifts in a PPC in terms of an economy’s growth

1.3.1 Opportunity cost

Opportunity cost is the value of the best option you pass up by making a choice. Scarcity forces choice, and every choice has an opportunity cost.

Three rules keep your answers accurate.

• Only the next best alternative counts, not every alternative you rejected.
• It is a benefit lost, not always a sum of money. It can be time, output, a service or a different use of land.
• It is not the same as the money price. The price of a ticket is a money cost. What you could have done with that money instead is the opportunity cost.

Worked example (consumer). Amira has 24 units to spend. Her options, in order of preference, are a concert ticket (24), a cap (20) and a book (18). She buys the ticket. The opportunity cost is the cap, her next best choice. The book is not part of the cost.

Worked example (time). Rahul spends 3 hours on a Saturday playing football. He could have earned 6 units an hour in a part-time job. Opportunity cost = 3 × 6 = 18 units of earnings forgone.

Other contexts. A farmer who plants wheat gives up the vegetables the same land could have grown. A government that builds a road gives up the clinics or schools the money could have funded. A firm that uses its own warehouse gives up the rent it could have earned.

1.3.2 How opportunity cost influences decisions

Decision makers compare the benefit of the choice with the benefit of the best alternative. If the alternative is worth more, a rational decision maker changes course.

Consumers

Consumers have limited income, so buying one item means giving up another. If the cap in the earlier example became cheaper or more fashionable, Amira might switch to it, because the benefit of the best alternative has risen. Attractive alternatives reduce how much people buy of a good.

Workers

Workers choose between jobs, between work and leisure, and between work and study.

Worked example. A worker earns 2,400 a month and leaves her job for 24 months of full-time study. Fees are 3,000 a year.

• Earnings forgone = 2,400 × 24 = 57,600
• Fees = 3,000 × 2 = 6,000
• Total cost of studying = 57,600 + 6,000 = 63,600

She will study only if she expects the extra pay and satisfaction from the qualification to be worth at least this. A higher wage raises the opportunity cost of leisure and study, which is one reason some people choose to work longer hours.

Producers

Producers have limited land, labour and capital. A farmer has 50 hectares. Wheat would earn 40,000 profit and vegetables 46,000. Growing wheat has an opportunity cost of 46,000, so the farmer should plant vegetables unless risk, soil or other factors change the picture. A firm using its own premises should compare the profit from using it with the rent it could earn.

Governments

Governments have a limited budget. If a ring road costs 84 million units and a clinic costs 14 million units, spending on the ring road gives up 84 / 14 = 6 clinics. This does not mean the ring road is wrong. It means the government should judge whether its benefits are worth six clinics. Decisions on taxes, borrowing and spending priorities (health, defence, education, transport) all involve opportunity cost.

Evaluation. Opportunity cost is hard to measure when benefits are not in money terms (cleaner air, safety, leisure). Decision makers also lack perfect information, so the “next best” alternative is often an estimate. Different people value the same choice differently.

1.4.1 The production possibility curve

A production possibility curve (PPC) shows the largest amounts of two goods, or two types of goods, that an economy can make together in a period when every resource is fully and efficiently used and technology is fixed.

To draw it:

1. Put one good on each axis (for example rice on the vertical axis and boats on the horizontal axis).
2. Plot the combinations and join the points with a smooth line.
3. Label the axes, the curve, and the points you refer to.

Country A (invented). It uses all its resources to produce rice (thousand tonnes) and boats.

Combination	Boats	Rice (thousand tonnes)
A	0	100
B	10	96
C	20	84
D	30	60
E	40	0

Rice
100 A
 96   B
 84      C
 60           D
  0                  E  Boats
  0   10  20  30  40

The curve slopes downward because more of one good means less of the other. It bows outward (is concave to the origin) because resources differ in how well they suit each good. This leads to increasing opportunity cost, covered in 1.4.3.

A PPC can be a straight line. This shows constant opportunity cost, which happens when resources are equally suited to both goods. A bakery that can bake 100 loaves or 50 cakes with the same time and ovens gives up 2 loaves for every cake, whatever the mix.

The PPC illustrates scarcity (the economy cannot go beyond the curve), choice (it must pick a point) and opportunity cost (the slope). As a model it shows only two goods, assumes full employment and says nothing about how output is shared.

1.4.2 Points under, on and beyond a PPC

Position	Meaning
On the curve	Resources are fully and efficiently used. This is the maximum output for that combination.
Under (inside) the curve	Resources are unemployed or used inefficiently. The economy could produce more of at least one good without giving up the other.
Beyond (outside) the curve	Unattainable with current resources and technology.

Worked example. Country A produces 20 boats and 70 thousand tonnes of rice (point P).

• At 20 boats the curve allows 84 thousand tonnes (point C), so P is under the curve.
• The shortfall is 84 − 70 = 14 thousand tonnes.
• As a percentage of what is possible: 14 / 84 × 100 = 16.7%.

Moving from P to C adds 14 thousand tonnes at no opportunity cost, because idle resources are put to work. A point such as 20 boats and 95 thousand tonnes lies beyond the curve (95 is 11 more than 84), so the economy cannot reach it now.

Causes of points under the curve include unemployment, a recession, a disaster that stops production, and poor allocation of workers to jobs. The result is lost output and lost tax revenue.

1.4.3 Movements along a PPC and opportunity cost

A movement along a PPC means reallocating resources between the two goods. The opportunity cost of moving is the amount of one good lost to gain the other.

Worked example (Country A).

Move	Boats gained	Rice lost (thousand tonnes)	Rice lost per boat
A to B	10	100 − 96 = 4	0.4
B to C	10	96 − 84 = 12	1.2
C to D	10	84 − 60 = 24	2.4
D to E	10	60 − 0 = 60	6.0

Each extra 10 boats costs more rice. This is increasing opportunity cost. Early in the move, resources best suited to boats (such as shipbuilders) switch over. Later, farmland and farm workers must switch, and they are poor at building boats.

To compare the opportunity cost of a boat, use: opportunity cost of one boat = rice lost / boats gained. Moving from C to D, it is 24 / 10 = 2.4 thousand tonnes of rice per boat.

A movement is a choice about the current mix of goods. It is not growth.

1.4.4 Shifts in a PPC

A shift means the economy’s productive capacity has changed. An outward shift shows economic growth (more potential output). An inward shift shows a fall in capacity.

Causes of an outward shift

• More resources: new land, a larger labour force (through migration or higher participation), more capital goods through investment.
• Better quality: education and training, healthier workers, better machines.
• Better technology and more efficient methods.
• Discovery of natural resources.

Causes of an inward shift

• War, natural disasters (flood, drought), disease reducing the labour force, depletion of resources, and emigration of skilled workers.

Parallel and biased shifts

Worked example. Country A’s capital stock grows and all resources become 15% more productive.

• New maximum rice = 100 × 1.15 = 115 thousand tonnes
• New maximum boats = 40 × 1.15 = 46

The whole curve moves outwards on both axes, and output at every point can be raised by 15%.

Suppose instead that new farming methods raise maximum rice from 100 to 130 thousand tonnes, with no change to the maximum of 40 boats. Growth in rice capacity = (130 − 100) / 100 × 100 = 30%. The curve pivots outwards on the boats axis, because only the rice axis moves. The economy can then produce more rice at each level of boat output, but the maximum number of boats is unchanged.

A flood destroys a quarter of Country A’s farmland. Maximum rice falls from 100 to 75 thousand tonnes, a fall of 25%. The curve shifts inwards on the rice axis.

Actual and potential growth

• Potential growth is an outward shift of the PPC.
• Actual growth is a move from a point under the curve towards the curve, as idle resources are used.

Consequences of growth

• Higher living standards: more goods and services per person are possible.
• Lower opportunity cost of meeting wants, and room to spend on health, education and the environment.
• Higher incomes and tax revenue.
• Possible costs: pollution, depletion of resources, and unequal sharing of gains.

Capital goods and consumer goods. Putting resources into capital goods now means fewer consumer goods now but a larger PPC later. Suppose Country X invests heavily, and its maximum consumer goods output rises from 200 to 230 over some years, while Country Y’s stays at 200. X’s growth is (230 − 200) / 200 × 100 = 15%. The price is lower consumption today.

Evaluation. An outward shift only raises potential output. Whether people benefit depends on using resources fully, on the mix of goods produced and on how income is shared. Growth that depletes resources can eventually shift the curve back.

Common errors

• Giving all rejected alternatives as the opportunity cost instead of only the next best.
• Writing that the opportunity cost of a decision is its money price.
• Drawing a PPC that is convex or crosses an axis, or that has unlabelled axes.
• Treating a point under the curve as “on” it, or a point beyond it as possible.
• Describing a movement along a PPC as growth.
• Confusing a shift of one axis with a shift of the whole curve.

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.