There are two kind of advantages for a company that are Absolute advantage and the Comparative advantage. Here in this guide, we are going to give you a complete detail on the absolute advantage and the comparative advantages along with their comparisons.
What is absolute advantage?
The absolute advantage can be defined as the ability of the company to produce more quantity of the product using the same quantity of input or the raw material in the same time. Or it is defined as the production of same quantity of the product in the same time using less quantity of input or the raw material. In simple words, we can say that absolute advantage is when the company produces more products in less expenditure.
It is direct advantage to the company as they can save more money in producing the same or more amount of product. The absolute advantage results from the more efficient process in which the company get the ability to produce products and service at lower or less absolute cost per unit by investing less inputs and thus more profit to the entity.
The absolute advantage is when the company produces more or equal amount of product or service using the same or less amount of input respectively. The absolute advantage might sound less profitable but in bulk it can lead to large gains for the company when they produce products in bulk amount.
The company can gain from absolute advantage by better management, more efficient processes, specialization, better division of labor and skills, and thus help the company to earn more and grow more.
The concept of absolute advantage can be used by the company or the country in gaining more profit by specializing in producing, using more efficient process for production, proper management of capital, resources, skills, and labor and thus earning more by exporting products to other countries.
Example of Absolute advantage
The best example of Absolute advantage is Saudi Arabia country as they can easily extract oils using less inputs. Other examples are the climatic condition of Colombia that allows more production of coffee in these country using the same inputs.
What is comparative advantages?
The comparative advantages can be defined as the process for the company to produce goods or service in less or at lower opportunity costs in comparison to other trading partners. With the help of comparative advantage, the company ill get the option to produce products at comparatively low cost per unit and thus get the option to sell the product or service at comparatively low costs in compare to the other competitors companies. When the cost of the product or service is low, there is more chances that its sale will be much more then the competitor’s companies and thus more profit.
In simple words, the comparative advantages is an financial ability for the company for more production of a good or service at comparatively low cost per unit and thus they can offer less price in comparison to other trading competitors.
The concept of comparative advantage suggests the company or the country to trade at opportunity cost and thus earn relative advantage in. It suggest the company to try trading at opportunity costs in order to earn relative profit.
The concept of comparative advantage is very important for a company and the country that they all should try taking advantage of opportunity price and thus earn more profit in comparison to other competitors. The concept of comparative advantage is also a base for the international trading. The company or the nation who use to adopt the strategy to get comparative advantage are more likely to grow better and earn more profit.
In order to understand the key principle of the comparative advantage, the company should take advantage of the opportunity cost which is should be lower than the other competitor company and thus produce more product in lower price per unit.
When the production cost is low, there will be direct advantage or the benefit to the company. Even the small benefit on production of one product will add up and combined lead to major benefit to the company when they produces in bulk amount.
Another way to gain profit from the comparative advantage is by selling products at comparative lower cost. When the company is spending less on pr product, it is possible for them to sell it on lower cost in comparison to other competitors and thus more sale which ultimately lead to more profit.
Example of comparative advantage
England country gets the opportunistic cost for the manufacturing of cloths and thus they can manufacture cloths at comparative less cost in compare to other countries. Similarly, the Portugal country is having the opportunistic cost for the manufacturing of wine and thus they can produce wine in comparative lower cost. Both of these are the example of comparative advantage where the country can earn more profit by producing the product where they get opportunistic price.
Absolute advantage Comparative advantage
In absolute advantage, the company have the ability to produce more goods or better quality goods using the similar input or can produce same amount and quality of goods using less inputs then other companies. While in comparative advantage, the producer has the power of opportunity cost which is lower than the cost that other competitor companies pays and thus can produce products or service at comparatively low cost per unit.
With the help of absolute advantage, the companies or the country get the option to earn unambiguous gains by specializing in the product or trading only in that product where they can get absolute advantage. This mean, the company or the country trade in that product only where they can produce the same quality or same quantity of product using the less inputs in comparison to other competitors.
While in the comparative advantage, the company produces products or services at lower costs and this advantage is not related to the production of more quantity of product. The comparative advantage basically means where the company can earn by producing product or services at lower cost.