Competitive Advantage and Comparative Advantage
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What is the difference between competitive advantage and comparative advantage?
An advantage that a firm has over its competitors, that differentiates the Product or services offered by the firm and allows the firm to reduce it’s Cost or generate Higher Revenue or Margin is known as Competitive Advantage. A competitive advantage is something that a consumer views in a product or service as having higher value than the other competitors of the firm in the industry. It is an expertise that one firm has. There are many types of competitive strategy that a firm adopts so as to give a competitive advantage to the firm. E.g. Cost leadership: A firm produces the lowest cost product in the entire industry.
Comparative Advantage: When one firm/country is able to produce Goods or Services at a lower Opportunity Cost over another firm/ country, it is said to have a Comparative Advantage. For E.g. if one country uses more machines and produces 10 units of each Meat and Clothes in one hour. And another country uses fewer machines and produces either 4 Meat or 6 Clothes in an hour, each country can gain from trade because their internal trade-offs between Meat and Clothes are different. The country that uses fewer machines has a Comparative advantage in producing clothes, hence it is more beneficial to produce and trade Clothes with the other country. The country that uses more machines has a comparative advantage in producing Meat, hence it is beneficial for them to produce and trade Meat with the other country.