Economics Part A

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David Daly
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Economics Part A

hi there
I don't understand what's the difference between absolute advantage and comparative advantage and why do I need both of them?

Jason Pride
Jason Pride's picture

Hi David,

With absolute advantage a firm or country can produce more output than any competitor using the same amount of input.
With comparative advantage a firm or country can produce more of some goods at a lower marginal cost than a competitor.

So if one firm is capable of producing widget A and widget B at the same rate while another firm is only able to produce widget B, but at a faster rate or lower cost the second firm has a comparative advantage and the first firm will be better off if it produces only widget A and buys widget B from the second firm.