Cambridge International as and a level Economics Ebook

Military goods
Consumer goods
10,000
0
8,000
4,000
6,000
8,000
4,000
12,000
2,000
16,000
0
20,000
Table 1.2 
Production possibility schedule 1
Figure 1.6 
A production possibility curve
Consumer goods
10
20
0
Military goods
a
b
c
d
X
’000
’000
Y
27
Chapter 1: Basic economic ideas and resource allocation

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the curve from point 
a
through to point 
d
then a diff erent 
combination of goods is being chosen. More consumer 
goods are being produced and fewer military goods. Th
is 
emphasises that the cost of producing more consumer 
goods is the military goods that have to be sacrifi ced. 
Given the fi gures, we can calculate the opportunity 
cost of consumer goods in terms of military goods. A 
move from 
b
to 
c
on the graph leads to a gain of 8,000 
consumer goods but we sacrifi ce 4,000 military goods. 
Th
e opportunity cost of one consumer good is therefore 
half of a military good. Th
is is equivalent to one military 
good having an opportunity cost of two consumer goods. 
As we move along the curve, the composition of our 
output is being transformed. We should also note that 
for this to happen we need to switch our resources from 
one use to another. Resources have to be switched from 
producing military goods to producing consumer goods 
and vice versa. Th
is is known as the 
reallocation of 
resources
and in the real world, as we decide to change 
the composition of our output, we need to consider 
the costs of reallocating resources between uses. Th
ese 
include the costs of retraining the workforce in the skills 
required to produce diff erent types of goods and services. 
Th
is might take a long time and might only be possible as 
new entrants to the labour force are trained in new skills. 
Th
e extent to which resources can be reallocated from 
one line of production to another is known as