Cambridge International as and a level Economics Ebook

capital consumption
or depreciation describe 
the using up of capital goods during the process of 
production. Some resources need to be devoted to the 
production of capital goods if production possibilities 
are to be maintained. Th
e creation of capital goods in the 
process of production is known as 
investment
. Th
is can 
be defi ned as ‘any production other than for current 
consumption
’
. A choice has to be made therefore between 
producing consumer goods and services or producing 
capital goods through the process of investment. Th
e 
more consumer goods and services produced, the higher 
the current standard of living, but the standard of living 
might fall in the future if there is a failure to produce 
suffi
cient capital goods to replace those worn out in 
the process of production. In addition, the quality of 
an economy’s capital goods will not be improved and 
the full benefi ts of new technology will not be enjoyed 
if there is a failure to devote suffi
cient resources to 
investment.
Figure 1.10
 shows the production possibilities between 
capital goods and consumer goods. Th
ese possibilities are 
determined by the quantity and quality of resources in the 
economy, which include the capital goods that have been 
produced in the past. If we assume that the quantity of 
capital goods which are wearing out in each time period 
is shown at 
a
, then we can see the consequences of our 
choices. If we fail to produce the quantity at 
a
then our 
capital stock will decline. Production possibilities will 
diminish and the curve will shift to the left .
SELF-ASSESSMENT TASK 
1.6
Corn, soya beans or both? Choices facing Brazilian farmers
In recent years there has been a significant increase 
in the production of biofuels in countries such as 
Brazil where crops are used to produce ethanol. This 
alternative clean-burning fuel can be made from corn 
and soya beans. 
Table 1.4 
shows how production of both 
crops has increased in Brazil in response to the insatiable 
demand for fuel that is required by the country’s ever-
increasing numbers of cars and trucks.