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Definition of Absolute Advantage:
is the ability of a person, company, or country to produce a particular good or service more efficiently than another producer.
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.
Assume that Joseph and Victoria are dentists. The table below shows their daily production possibilities for filling cavities and completing bridge work. This means that Victoria is able to complete a maximum of four bridges in one day if she just did only bridge work. If she did only cavities she could fill 20 in a day. If Joseph completed 12 bridges in a day he would not be able to fill any cavities, and 24 cavities if he neglected the bridges.
Victoria can produce only 4 bridges per day, while Joseph can produce 12. Joseph is clearly 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 .2 bridges (4 / 20). Therefore her opportunity cost for cavities is .2 bridges. Joseph's opportunity cost for cavities equals .5 bridges. When Joseph fills a cavity he gives up the opportunity to complete .5 bridges (12 / 24). Victoria has the comparative advantage in cavity work because her opportunity cost of .2 is less than Joseph's of .5.
Joseph has the comparative advantage in bridge work. Joseph gives up the opportunity to fill 2 cavities if he constructs a bridge (24/12). Victoria gives up the opportunity to fill 5 cavities for every bridge, so her opportunity cost is 5. Clearly Joseph has the lower opportunity cost and the comparative advantage in bridge work.
This means that Joseph should specialize in bridge work while Victoria should focus on cavities. The productivity would improve after merging the two practices if each dentist specialized in the area they have the comparative advantage. Assume that in a typical 8 hour day Joseph completes six bridges and twelve cavities. (It takes Joseph .67 hours to complete a bridge, and .33 hours to fill a cavity.) Victoria is not as productive, but she is able to complete three bridges and five cavities in a typical day. (Bridges take Victoria two hours and cavities take her .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 a total of 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
Supply and Demand - The Costs and Benefits of Restricting Supply
Production Possibilities Frontier