Comparative Advantage
Comparative Advantage
First let us define the comparative advantage which is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
If one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods) that they should trade. What happens if one country is better at producing both goods? Should the two countries still trade? This question brings into play the theory of comparative advantage and opportunity costs.
The everyday choices that we make are, without exception, made at the expense of pursuing one or several other choices. When you decide what to wear, what to eat for dinner, or what to do on Saturday night, you are making a choice that denies you the opportunity to explore other options.
The same holds true for individuals or companies producing goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item.. In economic terms, the amount of the good or service that is sacrificed in order to produce another good or service is known as opportunity costIn economic terms, opportunity cost is the amount of good or service that is sacrificed or given up in order to produce another good or service.. A country is said to have a comparative advantage in whichever good has the lowest opportunity costIn economic terms, opportunity cost is the amount of good or service that is sacrificed or given up in order to produce another good or service.. That is, it has a comparative advantage in whichever good it sacrifices the least to produce.
The concepts of opportunity costIn economic terms, opportunity
First let us define the comparative advantage which is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
If one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods) that they should trade. What happens if one country is better at producing both goods? Should the two countries still trade? This question brings into play the theory of comparative advantage and opportunity costs.
The everyday choices that we make are, without exception, made at the expense of pursuing one or several other choices. When you decide what to wear, what to eat for dinner, or what to do on Saturday night, you are making a choice that denies you the opportunity to explore other options.
The same holds true for individuals or companies producing goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item.. In economic terms, the amount of the good or service that is sacrificed in order to produce another good or service is known as opportunity costIn economic terms, opportunity cost is the amount of good or service that is sacrificed or given up in order to produce another good or service.. A country is said to have a comparative advantage in whichever good has the lowest opportunity costIn economic terms, opportunity cost is the amount of good or service that is sacrificed or given up in order to produce another good or service.. That is, it has a comparative advantage in whichever good it sacrifices the least to produce.
The concepts of opportunity costIn economic terms, opportunity