Comparative advantage is the ability to produce goods or services at a lower unit price than competitors. It considers factors such as opportunity cost, production rate, and base price per unit.
Comparative advantage is the ability of an entity to produce goods or services of similar quality but at a lower unit price than other competing entities. In most cases, the principle of comparative advantage is used to compare the output in production between two countries producing the same type of good or service. Sometimes referred to as an absolute plus, the process will address different aspects of the manufacturing process.
Comparative advantages, to be precise, must define the perimeter of the factors that will be taken into consideration. Opportunity cost is a common element used in nearly every example of comparative advantage. In essence, opportunity costs are the economic costs associated with using a resource for a specific activity. In this context, comparative advantage will address what consequences, if any, the entity will suffer by choosing to use the resources to produce a certain product rather than using the resources in another application.
In addition to addressing opportunity cost, comparative advantage will also look at the overall production of the good or service within a given time period. This helps identify any incidents where external factors within each production environment appear to help or hinder the production rate consistently. If there are factors like political unrest or recurring weather conditions affecting the production rate, these will be noticed.
Finally, comparative advantage almost always addresses the base price per unit produced. This figure, while not the single most important element in a comparative advantage, has a huge impact. The ability to produce goods cheaply often means the ability to sell the units at a competitive price but still make higher profits from the business. Efficiency in production is often the factor that most influences the cost of production per unit, but the cost and availability of raw materials will also play a significant role in determining the production price of each unit for sale.
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