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Opportunity Cost
An opportunity cost is the potential ‘alternative’ or benefit that is forfeited when one chooses a particular option.
The other, foregone option, if it is lower than other companies, is the key factor in this trade-off.
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Microeconomics: Comparative Advantage
The law of comparative advantage was first mentioned in 1817 by English economist David Ricardo.
A company has a comparative advantage when it is able to provide a good or service at a lower opportunity cost than others, helping it sell the same product at a lower cost, ...
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Comparative Advantage vs. Competitive Advantage
When a company is at a better position to provide strong value to the customer, it is said to be at a competitive advantage.
Example: A cable TV operator offers low cost wifi internet services at great speeds and no downtime, which isn’t offered by the competition in ...
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Skills: Diversity And Specialization
Comparative advantage is also measured by the salary yardstick, and how much a person’s time, skills and core skill sets are worth.
Example: Michael Jordan is a skilled basketball player, and is very tall. If he wants, he could paint his own house by himself and do it quickly due to h...
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Comparative Advantage: Rules, Regulations and Restrictions
Governments around the world impose rules, regulations and restrictions like:
- Tariffs
- Selective trade agreements.
- Lobbying and rent-seeking to protect a country's interests.
- Tax breaks and special deals
- Sanctions
These practices e...
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Comparative Advantage in International Trade
Certain countries have unique strengths, local resources and talent that can be a comparative advantage to them, and make products at a cheaper cost than other countries. If they indulge in protectionism, the end result is higher costs and inefficiency for all.
Example: China ...
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Comparative Advantage Vs. Absolute Advantage
- Comparative advantage is only an advantage of a lower opportunity cost, and does not factor in volume or quality.
- Absolute advantage is the pure ability of a company to produce better goods or services (in quantity or quality) than...
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Calculating Opportunity Cost
The way to calculate the opportunity cost is to subtract the value of the option from the value of the alternative that is foregone.
Opportunity Cost = Return on the best foregone alternative - Return on the chosen option.
Opportunity Cost
It is the estimated value of the best alternative or the best option that one misses out as a consequence of picking one particular option.
Example: Spending a limited resource, like Money, on healthcare, comes with the 'opportunity cost' of being unable to spend that amount on ed...
Opportunity Cost
Saying 'yes' to something automatically means saying 'no' to other possibilities. This is known as Opportunity Cost. It translates into the potential benefits that we miss by choosing one option over another.
Subconsciously we are aware that we can't do everything we want ...
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