Explaining Comparative Advantage
comparative advantage is the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. having a comparative advantage doesn't mean that one entity is absolutely better than another at producing a good or service. it means that it sacrifices less to do some. suppose ? and ? want to raise money for their favorite charity through a bake sale. on a normal day, ? can bake six chocolate cakes and three ? pies for $30 each. ? can bake four cakes and three pies in one day also for $30 each. ? is baking nine ? per day and earning $270, while ? is baking seven ? per day and earning $210. together, they can make a total of 16 ? and sell them for a total of $480. but what if they both focus on baking a good ? in which they have a comparative advantage. if ? moves his resources into baking chocolate cakes only, the opportunity cost of each extra cake per day will be half of ? pie. the same decision for ? is an opportunity cost of three quarters of a pie. with fewer pies to sacrifice, ? has a comparative advantage over ? in cakes, so he should make only cakes for the fund-raise event. if both examine their comparative advantage in pie baking, ? will give up two cakes for each extra pie he bakes, while ?'s opportunity cost is only 1.3 cakes. ? should then focus on pie baking only since he has a comparative advantage over ?. if they follow this measure, ? makes twelve cakes and earns $360. ? bakes six pies and earns $180. together, they've earned $540, which is $60 more for their charity than if they hadn't specialized based on comparative advantage.