Comparative advantage is producing something at a cheaper rate than competitors, while competitive advantage is being a leader in a market sector with higher profits and lower costs. Entities must assess their strengths and weaknesses to discover areas of advantage and decide whether to produce or import. Competitive advantage focuses on profit and price advantages, while comparative advantage focuses on ease of production.
Comparative and competitive advantage are different terms which mainly refer to what informs the decision behind choosing what to produce in a competitive market. Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than its competition or other countries. Competitive advantage occurs when a company emerges as a leader in its market sector due to the ability to produce goods or provide services with higher profits than the competition and at a lower cost to consumers.
In the analysis of comparative and competitive advantage, the entities involved must conduct an assessment of their strengths and weaknesses in order to discover their areas of advantage. In comparative advantage, an entity might have an advantage in manufacturing a product due to the fact that the raw material used for manufacturing is readily and economically available. An example is two countries that produce motor oil lubricants. Country A may be located in an oil producing country in the Middle East, while Country B is located in Asia.
Using the example above, country A has a comparative advantage because it produces the raw materials for the production of motor oil lubricants. Country B has to import the raw materials from Country A or other oil-producing countries at considerable cost. This means that Country B is relatively disadvantaged when it comes to the production of motor oil lubricants compared to Country A. To this end, Country B may want to look for something else where it has a comparative advantage.
Furthermore, when assessing the factors of comparative and competitive advantage, the entities involved should decide whether it is better to produce or whether it is easier and cheaper to import the item in question. This is especially true for a situation where one company has a comparative advantage in manufacturing a product. On the other hand, competitive advantage focuses on profit advantages and price advantages.
In competitive advantage, a company has an advantage over other companies in a competitive market when it is able to offer similar or related products to customers at a lower price than its competitors. The second factor in a competitive advantage is whether the company is also able to make more profit than its competitors even by selling the products at a reduced price. For example, if 15 companies in a geographic region produce athletic shoes, the one that is able to sell its athletic shoes to consumers at a lower price than the others and make even more profit has the competitive advantage. Thus, the main difference in comparative and competitive advantage lies in that the competitive advantages are decided by higher profits and lower costs for the consumers whereas the comparative advantages are decided by the ease of production.
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