Editing Opportunity cost (section)

=== Comparative advantage versus absolute advantage ===
When a nation, organisation or individual can produce a product or service at a relatively lower opportunity cost compared to its competitors, it is said to have a [[comparative advantage]]. In other words, a country has comparative advantage if it gives up less of a resource to make the same number of products as the other country that has to give up more.<ref name=":02">{{cite book|last1=Layton|first1=Allan|title=Economics for Today|last2=Robinson|first2=Tim|last3=Tucker|first3=Irvin B. III|publisher=Cengage Australia|year=2015|isbn=9780170276313|edition=5th|pages=131–132, 479–486}}</ref>

[[File:Comparative Advantage Example.png|thumb|A simple example of comparative advantage]]
Using the simple example in the image, to make 100 tonnes of tea, Country A has to give up the production of 20 tonnes of wool which means for every 1 tonne of tea produced, 0.2 tonnes of wool has to be forgone. Meanwhile, to make 30 tonnes of tea, Country B needs to sacrifice the production of 100 tonnes of wool, so for each tonne of tea, 3.3 tonnes of wool is forgone. In this case, Country A has a comparative advantage over Country B for the production of tea because it has a lower opportunity cost. On the other hand, to make 1 tonne of wool, Country A has to give up 5 tonnes of tea, while Country B would need to give up 0.3 tonnes of tea, so Country B has a comparative advantage over the production of wool.

[[Absolute advantage]] on the other hand refers to how efficiently a party can use its resources to produce goods and services compared to others, regardless of its opportunity costs. For example, if Country A can produce 1 tonne of wool using less manpower compared to Country B, then it is more efficient and has an absolute advantage over wool production, even if it does not have a comparative advantage because it has a higher opportunity cost (5 tonnes of tea).<ref name=":02" />

Absolute advantage refers to how efficiently resources are used whereas comparative advantage refers to how little is sacrificed in terms of opportunity cost. When a country produces what it has the comparative advantage of, even if it does not have an absolute advantage, and trades for those products it does not have a comparative advantage over, it maximises its output since the opportunity cost of its production is lower than its competitors. By focusing on [[Division of labour|specialising]] this way, it also maximises its level of consumption.<ref name=":02" />