Specialization and comparative advantage are related concepts. Comparative advantage refers to lower manufacturing costs, while specialization is when an entity focuses on producing a specific item. A company with a comparative advantage may choose to specialize in that item. An example is a company in a country with easy access to raw materials specializing in producing orange juice. Opportunity cost analysis can also identify comparative advantage.
Specialization and comparative advantage are separate but related concepts. Comparative advantage refers to a situation where two entities may produce similar products, but one entity may have an advantage over the other due to lower manufacturing costs or other identified factors. Specialization refers to a situation where an entity chooses to focus on the production of an item due to numerous perceived benefits and advantages. Thus, specialization and comparative advantage are related because a firm that has a comparative advantage in manufacturing a particular item may choose to specialize in manufacturing that item.
An example of specialization and comparative advantage can be seen in a case where two companies located in different countries produce similar items. Assuming the item is orange juice and country A produces large quantities of oranges while country B has to boost its weaker production with imported oranges, then the company in country A has the comparative advantage. The reason the company in country A has the comparative advantage is because it can produce the oranges cheaper than if the company is in country B.
In this sense, the company from country A could decide to specialize in the production of orange juice as it has the comparative advantage due to easy access to raw materials. This reduces the expense and logistics involved in importing oranges. The relationship between specialization and comparative advantage is mainly due to the fact that specialization could be the natural consequence of an identified comparative advantage.
Another way to identify comparative advantage is to analyze the opportunity cost of producing a commodity. For example, if Company ACB and Company XYZ both produce body lotion and body powder, the company that has the comparative advantage over the other can be found through an opportunity cost analysis of manufacturing the products. two articles. If ABC makes body lotion for $12 per jar and makes body powder for $3 per jar, the opportunity cost of making body lotion is $9 or three jars of powder. If XYZ makes the body lotion for $10 and the powder for $5, then its opportunity cost of making the body lotion is $5, or a jar of the powder. Clearly, ABC should have a comparative advantage in powder production and should specialize in this production, while XYZ should specialize in body lotion production.
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