RESERVATION PRICE: The lowest price at which a supplier is willing to supply any amount of a good. This is usually based on the minimum cost of production. For labor, it's the lowest wage that makes it worthwhile to get up in the morning, miss your favorite daytime television shows, and go to work.
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The general ability to produce more goods or services using fewer resources. A person or country has an absolute advantage in production largely due to superior technology or greater technical efficiency. A related, but contrasting concept is comparative advantage. Both terms are perhaps most important to the study of international trade, but also provide insight into other exchanges. An absolute advantage exists if a person, country, business, government, or some other entity can produce more output using fewer inputs than a comparable entity. An absolute production advantage arises because of technological or technical superiority. That is, the producer is able to produce more with less.
Note that an absolute advantage depends on the physical quantities of the inputs used and is not based on the cost of those inputs. It might be that fewer inputs are used, but that those inputs have a greater opportunity cost. A consideration of the opportunity cost of the inputs used gives rise to a related, and more important concept, comparative advantage.
While a person, country, business, government, or other producing entity may or may not have an absolute advantage in production, every producer has a comparative advantage in the production of something.
Head of the ClassTo illustrate the notion of absolute advantage, consider the case of Lawrence Alexander III. Lawrence is an extremely talented and skilled individual, the type of person who can do EVERYTHING extremely well. In high school, Lawrence had an absolute advantage in the "production" of most activities. Lawrence was, and presumably still is, better than everyone at anything.
He was simply the best.
- He was the president of the senior class, all-star quarterback of the football team, and state-wide chess champion.
- He was an accomplished artist and writer, the lead in all of the school plays, editor of the school newspaper, and captain of the basketball team.
- He maintained a 4.0 grade average, volunteered at the homeless shelter, played drums and guitar in a rock band, and crafted fine furniture in his spare time.
Lawrence had an absolute advantage in high school (especially compared to classmates), because he could accomplish more, perform better, achieve higher standards, and produce more with less effort. He could whip out a 10-page term paper in an hour, build an elaborate bookcase in a day, or throw several touchdown passes during a football game.
Other humans would spend more time and generate less output.
However, even though Lawrence was and still is better at everything that anyone else, he does not do everything. After high school he obtained a medical degree and now devotes his productive efforts only to performing surgery. Rather than producing everything himself, he purchases the productive efforts from others using the income generated from his surgical activities.
In a like manner, nations can also have an absolute advantage in the production of goods. These nations are so "skilled" and "talented" that they can produce more output with fewer inputs. For a nation, this absolute production advantage typically arises due to technological superiority.
Head of the WorldOn the international trade front, it is quite common for one nation to have an absolute advantage in production over that of other nations. The hypothetical United Provinces of Csonda, for example, has technological superiority in the production of turnips, sundials, electronics, education, pocket watches, soft drinks, and plumbing supplies... to name just a few. Csonda can produce more of these goods using fewer resources than many other nations in the world, especially compared to another hypothetical nation, the Republic of Northwest Queoldiola.
To illustrate absolute advantage, take a look at the exhibit to the right. This chart presents the options facing the two hypothetical nations -- Csonda and Northwest Queoldiola -- for the production of two goods -- turnips and sundials. Each nation can produce either good. However, due to differences in technology, human capital, and available resources, each nation achieves a different technical efficiency for production.
|An Absolute Advantage
Csonda is able to produce 60 pounds of turnips or 20 sundials for a given unit of labor effort -- a month of work. In contrast, Northwest Queoldiola is able to produce only 20 pounds of turnips or 10 sundials with one month of labor.
These numbers indicated that Csonda has an absolute advantage over the Northwest Queoldiola in the production of both goods. Due to production superiority, Csonda can produce more of either good using the same amount of labor. Or, to emphasize technical efficiency, Csonda could can produce the same amount of each good as Northwest Queoldiola using less labor.
So Why Trade? A Comparative AlternativeA situation like this might not seem particularly conducive to much international trade. After all, if Csonda is better at producing everything than Northwest Queoldiola, what does Northwest Queoldiola have to offer in trade? What could Northwest Queoldiola possibly sell to Csonda, that the Csondan economy would not produce on its own?
The answer would seem to be nothing!
However, international trade between Csonda and Northwest Queoldiola is, in fact, a distinct possibility. Moreover, such trade can be beneficial to both nations. The key to trade rests not with the absolute abilities of Csonda production, but with the relative abilities of the two nations, what is term comparative advantage.
A country is said to have a comparative advantage if it can produce one good at a relatively lower opportunity cost than other goods, compared to the production in another country. Even though Csonda is absolutely better at producing both goods using than Northwest Queoldiola, Northwest Queoldiola actually incurs a relatively lower opportunity to produce one good (sundials).
Whereas Csonda gives up 3 pounds of turnips to produce one sundial, Northwest Queoldiola gives up only 2 pounds. Csonda can actually import sundials at lower opportunity cost than it can produce them domestically.
ABSOLUTE ADVANTAGE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 4, 2024].
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