Absolute Cost Advantage

Definition: Absolute cost advantage is defined as a firm’s ability to produce and sell more of a good or service using the same inputs and resources. The higher the absolute cost advantage, the more profitable a business is expected to be. Absolute cost advantage is the cost-benefit ratio of a good or service.

Absolute cost advantage focuses on how much money an alternative business is likely to make using a given technology or certain assets.

In economic terms, absolute cost advantage is usually expressed as an offsetting reduction in the price paid by consumers for the goods or services of one firm relative to the price paid by consumers for the goods or services of another firm, unless there is some central coordination or enforcement of such prices. An absolute cost advantage is when an industry generally has higher prices or a given price point for its goods relative to other industries. There is some factor in the industry process (complexity, effort required, quality control) that makes it more profitable than other industries at that price point.

Absolute cost advantage (ACE) is a measurement of how much a company would have to charge for selling goods at their cost, at an average price in the region. The higher ACE values are, generally speaking, the more profit and economies of scale exist within a firm. Conversely, the absolute cost advantage of zero indicates no profit, in both material terms and human costs.