The ability of an entity to produce a good at an opportunity cost that is lower than that of another producer is known as what?

• A. Absolute Advantage
• B. Monopoly
• C. Specialization
• D. Comparative Advantage

Answer: (D)

Comparative advantage is the ability to produce a good at a lower opportunity cost than others. Opportunity cost is what you forgo in order to produce something else—the next best alternative you give up. If a producer can make a unit of a good while sacrificing fewer units of other goods than another producer would have to, that producer has a comparative advantage in that good. Because of this, each producer should specialize in the goods where their opportunity costs are lowest and then trade, which increases total output for everyone.

This explains why even if one producer is more productive overall (has an absolute advantage in both goods), both parties can still benefit from trade by focusing on what they sacrifice less to produce.