As we can see, in order for this economy to produce more wine, it must give up
some of the resources it uses to produce cotton (point A). If the economy starts
producing more cotton (represented by points B and C), it would have to divert
resources from making wine and, consequently, it will produce less wine than it is
producing at point A. As the chart shows, by moving production from point A to B,
the economy must decrease wine production by a small amount in comparison to
the increase in cotton output.
However, if the economy moves from point B to C,
wine output will be significantly reduced while the increase in cotton will be quite
small. Keep in mind that A, B, and C all represent the most efficient allocation of
resources for the economy; the nation must decide how to achieve the PPF and
which combination to use. If more wine is in demand, the cost of increasing its
output is proportional to the cost of decreasing cotton production.
Point X means that the country's resources are not being used efficiently or,
more specifically, that the country is not producing enough cotton or wine given
the potential of its resources. Point Y, as we mentioned above, represents an
output level that is currently unreachable by this economy.
However, if there was
a change in technology while the level of land, labor and capital remained the
same, the time required to pick cotton and grapes would be reduced. Output
would increase, and the PPF would be pushed outwards.
A new curve, on which
Y would appear, would represent the new efficient allocation of resources.
