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COMPARATIVE ADVANTAGE VS ABSOLUTE ADVANTAGE IN ECONOMICS

In business, different companies that produce similar products occupy different positions in the market. This is because these companies develop their products differently and around different conditions of production. These conditions would determine the eventual cost of the products as well as the quality of the products and the quantity that the company will be able to produce. This is known as a business advantage in economics. This article is going to outline the difference between comparative advantage and absolute advantage in economics.

Comparative advantage

When a company or a country can produce a product using a lower opportunity cost than another company or country, the country is said to have the comparative advantage of the production of the product over the subsequent country. The entity is better suited to produce a larger quantity of the products while optimizing on the cost of production. The company or country also enjoys better flexibility on the pricing of the product depending on the price elasticity of demand.

Factors that affect the comparative advantage of business

All the factors that lead to differences in the comparative advantage of competitors revolve around the opportunity cost of production of the products.

Availability and price of raw materials

Countries or businesses that are in environments where the raw materials needed for production are readily and cheaply available would be better suited to create their products at a lower cost than opposing competitors who would have to procure raw materials and transport them with a hustle.

Availability and cost of labor

The difference in the availability of labor and the difference in the resources used to pay for the labor input have a significant effect on the overall opportunity cost of production. Where labor is cheaper, the cost of production lessens.

Technological efficiency

Better technology and machinery used for production means that the energy and time inputs for production are optimized. Better technology ensures you have maximum outputs while using the least amount of input.

Government levies and taxation

Government tax on products affects the overall amount of monetary resources that are invested in the manufacture and release of products. Different countries have different taxes that are involved with the production. The countries with less taxation position their industries with a comparative advantage over similar industries of competitor countries.

Transportation cost

The cost of transportation of raw materials and finished products to the market also affects the overall input amount that is invested in manufactured products.

Absolute advantage

A country or business is said to have an absolute advantage over another when it can deliver products that are of superior quality than the other country or business. Delivering products that are of better quality creates a tip in the demand of the products in the market depending on the eventual difference in the price of the products from the two businesses or countries. The price elasticity of demand will depend on the type of product.

Entities with an absolute advantage over their competitors and deal with products that have a lower price elasticity of demand will enjoy a monopoly of the market but entities that deal in high-end luxurious products; even though they have an absolute advantage over their competitors will only position them strongly but may not be able to dominate the market entirely. This is because the product will only be viable to members of the society who can afford the products.

Factors that determine the absolute advantage of business

The absolute advantage of the business is determined by the quality of input of the raw materials for the production of the product. The following is a breakdown of the input elements that would affect the absolute advantage between businesses and countries.

Raw material quality

The quality of material used for production affects the general quality of the finished products. For example, in manufactured agricultural products, the quality of the plants or animal product that is used for manufacture is what will determine the grade and quality of the finished products.

Financial strength and capacity

The financial capacity of the country or business will determine its ability to invest in better raw materials, labor and technology involved in the manufacture of products hence affecting the absolute advantage between businesses or countries.

Technological advantage

Countries with better technology can generate products that are superior to competitor products.

Labor and expertise

The level of knowledge that the professionals use to manufacture the products determine the quality of the produce at the end of the processes. This, of course, affects the absolute advantage because the business or country that hires better professionals is most likely the entity that will have a better product.

The differences between comparative and absolute advantage are anchored in the factors that affect the cost of production of the material. Comparative advantage is concerned with the opportunity cost of production while absolute advantage has to do with the quality of the inputs of production. For more information, please visit economics paper help.

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