What is the term for the ability to produce a good at a lower opportunity cost than another producer?

• A. Absolute advantage
• B. Substitution principle
• C. Comparative advantage
• D. Quaternary activity

Answer: (C)

The idea being tested is comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. Opportunity cost is what you give up to make one more unit of a good—the value of the next best alternative foregone. If one producer sacrifices fewer resources or gives up less of a second good to produce an extra unit of the first good, that producer has a comparative advantage in the first good. When each producer specializes in the good where they have the lower opportunity cost and then trades, total output rises and both can benefit, even if one producer is more productive in absolute terms for both goods. This concept is distinct from absolute advantage, which is about who can produce more with the same resources, not about the relative trade-offs. The other terms aren’t about these trade-offs in production costs, so they don’t capture why specialization and exchange can make everyone better off.