Absolute Advantage

View FREE Lessons!

Definition of Absolute Advantage:

Absolute advantage is the ability of a person, company, or country to produce a particular good or service more efficiently than another producer.

Detailed Explanation:

Individuals, companies, or countries have an absolute advantage if they can produce a good or service at a lower cost than other producers. John can manufacture a table in two hours. It would take Shirley three hours to build the same table. John has an absolute advantage over Shirley in manufacturing that specific table. Absolute and comparative advantage are frequently confused. The following example illustrates the difference. 

Suppose Joseph and Victoria are dentists. The table below shows their daily production possibilities for filling cavities and completing bridge work. Victoria could complete a maximum of four bridges in one day if she only did bridge work. If she did only cavities, she could fill 20 in a day. If Joseph completed 12 bridges in a day, he would be unable to fill any cavities, but he could fill 24 cavities if he neglected the bridges.

Absolute Advantage Chart

Because Victoria can produce only four bridges per day, while Joseph can produce twelve, Joseph is the more efficient producer of bridges, so he has the absolute advantage in bridge work. Joseph is also more efficient at filling cavities. He can fill 24 per day, while Victoria can only fill 20. Therefore Joseph also has an absolute advantage in cavity work.

However, Victoria has a comparative advantage in filling cavities. Why? Because her opportunity cost to fill a cavity is less than Joseph’s. When Victoria fills a cavity, she gives up the opportunity to complete 0.2 bridges (4 / 20). Therefore her opportunity cost for cavities is 0.2 bridges. Joseph’s opportunity cost for cavities equals 0.5 bridges. When Joseph fills a cavity, he gives up a chance to complete .5 bridges (12 / 24). Victoria has the comparative advantage in cavity work because her opportunity cost of 0.2 is less than Joseph’s of 0.5. 

Joseph has a comparative advantage in bridge work. Joseph gives up the opportunity to fill two cavities if he constructs a bridge (24/12). Victoria gives up a chance to fill five cavities for every bridge, so her opportunity cost is 5. Joseph has the lower opportunity cost and comparative advantage in bridge work.

Their combined productivity would improve if they merged their practices if each dentist specialized in the area they have a comparative advantage. Joseph should specialize in bridge work, while Victoria should focus on cavities. Suppose Joseph completes six bridges and twelve cavities in a typical eight-hour day. (It takes Joseph 0.67 hours to complete a bridge and .33 hours to fill a cavity.) Victoria is less productive because she can only complete three bridges and five cavities in a typical day. (Bridges take Victoria two hours, and cavities take her 0.4 hours.) If Joseph and Victoria formed a partnership where Joseph specialized in bridges and Victoria specialized in cavities, they could complete all of the work in 12.8 hours. In the remaining 3.2 hours, they could each generate added income for their new practice!

Dig Deeper With These Free Lessons:

Comparative Advantage and Specialization
Opportunity Cost – The Cost of Every Decision
Managing Supply Using Tariffs, Subsidies, Quotas & Licenses
Production Possibilities Frontier

Search the Glossary

Investment Calculator:

Market Overview:

Market quotes are powered by TradingView.com

Single Quote:

© Higher Rock Education and Learning, Inc. All rights reserved. No portion of this site may be copied or distributed by any means, including electronic distribution without the express written consent of Higher Rock Education and Learning, Inc.