Absolute Advantage, Opportunity Cost, Diminishing marginal utility

-         Absolute Advantage

Absolute Advantage refers to that producer who has a capability of producing higher quantity of a good or service than competitors, using fewer inputs than another producer.

                              Absolute advantage When comparing the productivity of one-person, firm, or nation to that of another.

                                 The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

For Example –

There are two farmers in my village they both have equal acres of land for agriculture. In summer season they produce wheat, between them one farmer uses lesser inputs to produce wheat as compare to other and get same advantage. First farmer has absolute advantage of producing wheat.

-         Opportunity Cost

The cost of loss other alternatives when one alternative is chosen.

Opportunity cost is what a person sacrifices when they chose one option over another.

(Opportunity Cost Formula = return of most lucrative option not chosen - return of chosen option)

For example –

My friend was working in a company and he was getting 200000/- per annul, but he thinks he can do better, after few years he left the job and started his own business. Till 4^th years he earned 100000/- each years.

Formula of Opportunity cost = 200000 – 100000 = 100000 is opportunity cost that my friend is losing.

Diminishing marginal utility –

The utility of first unit of consumption of a good or service produce more utility than the second good and subsequently using of extra units, it’s reduces the amount of utility.

For Example: -

Consuming of one sweet first time will give great test and good feeling as compare to second time and subsequently consuming of the sweets will reduce amount of utility.