How does opportunity cost determine comparative advantage?
Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. In the case of comparative advantage, the opportunity cost (that is to say, the potential benefit which has been forfeited) for one company is lower than that of another.
What is comparative advantage formula?
So to find out the comparative advantage for those two goods we need to find out the opportunity cost for producing one good over the other good as the number of skilled labor is the same. Comparative advantage is calculated as. Comparative Advantage = Quantity of Good A for Country X / Quantity of Good B for Country X.
How do you calculate the opportunity cost?
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns.
Which scenario is the best example of an opportunity cost?
The correct answer is a. A computer company produces fewer laptops to meet tablet demand. Opportunity cost defines the benefit obtained by having a commodity after forgoing some other commodity. In the problem statement, the computer company incurs an opportunity cost of laptops for tablets.
Who has comparative advantage example?
For example, if a country is skilled at making both cheese and chocolate, they may determine how much labor goes into producing each good. If it takes one hour of labor to produce 10 units of cheese and one of of labor to produce 20 units of chocolate, then this country has a comparative advantage in making chocolate.
What are three types of opportunity cost?
Three phrases in the definition of opportunity cost warrant further discussion–alternative foregone, highest valued, and pursuit of an activity.
What is the opportunity cost in this scenario?
The opportunity cost in this scenario is the three lost opportunities Harry experiences by deciding to go to his parents house. The term opportunity cost refers to the loss of potential gain from other alternatives when one alternative is chosen.
What is the difference between comparative advantage and opportunity cost?
Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison.
What companies have comparative advantage?
Amazon (AMZN) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.
Which gives a country a comparative advantage?
A comparative advantage in trade is the advantage that one country has over another in the production of a particular good or service. This advantage may come because of a country’s infrastructure, labor force, technology or innovations, or natural resources.
What does comparative advantage mean?
Definition of comparative advantage. Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare.