What is Absolute Advantage?
Definition: Absolute Advantage represents the benefit that some party has over others in a specific market – that they can produce a service or product at a lower cost and often sell it for a higher price.
Absolute advantage is a total market power on the part of one firm in a particular industry, and it is entirely possible for an industry without absolute advantages
Absolute advantage focuses on cost-benefit and quantity and is a valuable comparative standard for evaluating various competitive product ideas and market situations. As such, it is independent of considerations such as price, quality, and innovation. It is equally applicable to technologies, processes, and pricing structures, while it differs from them in that it emphasizes value or efficiency rather than quantity.
Absolute Advantage vs. Comparative Advantage
Absolute advantage is gained when using comparative advantage in an industry where the product or process is not well understood. For example, if you know how to make shoes but have never designed a pair of shoes, you are still likely to be better off creating a comparative advantage in creating the best possible shoes than trying to make shoes that are exactly like the current best shoes but at a higher cost.
Absolute advantage is generally considered to be the stronger force in decision-making. It is easier to convert potential gains into actual rewards than it is to lose potential gains through inaction or poor strategy. In other words, there is a tradeoff between potential and reward. A good comparative advantage takes advantage of both gaps and advantages (we tend to view the former as more valuable than the latter).
Absolute advantage refers to a comparative advantage in a good or service that is not offset by any other comparative disadvantage.
Absolute advantage, in the simplest terms, is the best way to structure a trade. If you have a great product and an invention that someone else wants to copy (or perhaps even better than yours), then you have an absolute advantage. If, however, the production costs for your goods are very high relative to their selling prices, then comparative advantage becomes more relevant. For example, suppose you have a high-quality portable typewriter, and someone offers you a low-quality copy made from wood that does not break down after one year. In that case, you have a comparative advantage in getting your product made.
Examples of Absolute Advantage
You can think of an absolute advantage in different ways. For example, A tech company might have an absolute advantage in software development because they have thousands of programmers working round-the-clock. In contrast, an individual company may have an absolute advantage in marketing because they set themselves up to make extremely high profits from every sale. That doesn’t mean that the individual company has a significant advantage, just that their part of the overall market (i.e., a small number of firms competing with them for customers) is not taking anything away from the tech giants.
How Can Absolute Advantage Benefit a Nation?
Absolute advantage gives a country an economic advantage over another country when they both produce the same good or service. It is strongest when a country produces the good at a lower cost and exports it to another country at a higher cost.
Absolute advantage can be measured in three ways. First, it can be seen in each nation’s ability to produce good and efficient goods more cheaply than any other nation. Second, it can be seen in each nation’s ability to produce goods at higher quality levels than any other nation. Finally, it can be seen in each nation’s ability to consume cheap goods produced by others at lower quality levels.
By trading with other nations, each nation will gain access to resources it lacks and develops products in areas where other countries may have blocked it. The loss of certain comparative advantages will balance the gain to each nation from trading with other countries.
How to achieve an Absolute Advantage?
Absolute advantage is achieved when costs are kept down, quality is increased, and improved efficiency. It lets you produce a higher quality product for less money while still enjoying the profit. Low-cost production is achieved when the tools and techniques used are adopted from the most efficient production methods available in modern industry.
It works by avoiding high costs that can damage a product’s performance when specialized tools are unavailable. Most such techniques were developed decades ago and are often considered “old-fashioned.” Yet practically every company with a major investment responsibility is still employing them.
There are three general methods for achieving an absolute advantage. The first is to concentrate on a relatively small number of low-priced competitors in a market. The second is to focus on a widely differentiated group in terms of quality but not price, and whose prices are also lower. Finally, several strategies combine both of these approaches.
First, you should try to find markets where prices are about the same as competitors, but production costs are much lower. This is often the case for low-cost producers in developing countries.
When choosing materials for an absolute advantage, the first and most important rule is to produce at a profit. For example, if you are making wind cells in China at the cost of $20 each, then there is no way you will be able to make a profit.
But if you are making the cells at a profit of $5 each, you can start looking at other materials that might improve your yield. Once you have identified materials with low costs and high yields for your absolute advantage, look for ways to reduce those inputs.
For example, if your two main suppliers have quality control issues that prevent you from getting free samples or prompt shipping on Low-Cost Producer (LCP) samples, try going to another supplier.
To judge whether a particular activity has an absolute advantage, we must measure the benefit gained by reducing the time or cost involved.
The natural advantage is the availability of resources. If you look at a country’s natural resources, you will see how natural resources boost its economy.
By being rich in natural resources, a country has an obvious economic advantage over countries with many natural resources. Maybe its sandy soil makes life here easier. Or perhaps the climate is friendly, allowing for a lot of agriculture production.
The natural advantage is earned when a country has an abundance of a specific good or service. Although this may not be obvious initially, this concept has important implications for foreign aid and trade policy.
A country’s natural resources may be of great value, but if they are too inexpensive or easily accessible by more efficient means, this country would lack a natural advantage. For example, if your country has good roads but no freshwater, it will lack natural resources.
Acquired advantages can be long-term or short-term in nature. Long-term acquired advantages include knowledge or skills that improve productivity and facilitate learning. Short-term acquired advantages can be created through the simple process of gaining knowledge in an area that could become advantageous after working on it for several years.
Acquired advantage can be used not just for the future but also for the present: you can use it today to improve your positions in any companies you’re interested in moving to or existing ones you’re considering joining.
Absolute advantage is when there are pre-established paths to success, but no other person has yet discovered or invented those paths. It’s not competition because a few individuals are already doing things well, and others will only benefit from their efforts. Absolute advantage is the strongest and most general form of competitive advantage. It can be applied across industries, markets, and even branches of a company.
The most fundamental way to think about absolute advantage is that the main thing it allows you to do is to win more than you lose. If you make a better product or service than your competitor, then you have an absolute advantage over them–your competitor will have to make more mistakes to catch up, and if he makes too many mistakes, then he won’t catch up with you.