Absolute Advantage Definition

Definition of ‘Absolute Advantage’

A business is said to have an absolute advantage over another if it can produce more of a product using the same amount of resources.

The advantage might arise from it having lower costs, using fewer resources, or from it operating more efficiently. The consequence of having an absolute advantage is that the business can produce products cheaper.

Absolute Advantage Example

For example, if a business can produce five units of a product in an hour compared to another business which produces three units, then the first business has an absolute cost advantage because it can produce two more units each hour.

In this example, both businesses have the same resources (one hour of labor), but the first business is able to produce more product (output). If the hour of labor cost 15.00, then the first business can produce the product for 15.00 / 5 = 3.00 per unit, whereas the second business produces them at the higher cost of 15.00 / 3 = 5.00 per unit.

For further information see the Wikipedia absolute-advantage definition.

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Absolute Advantage Definition May 26th, 2017Team

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