The principle of absolute benefit in economics refers to the ability of any business to make a commodity or service more cheaply than its competition. Adam Smith first identified the concept of absolute benefit in the context of free trade, with labor as his only input. Since then, economists have come to recognize the importance of competition in all economic activity, especially when it comes to services like health care and education.
If a company is able to produce and supply better products at lower prices than its rivals, it can provide consumers with more value for their money, especially if those goods and services are required in large quantities in order to provide a competitive advantage to itself. Economists use the term “absolute advantage” to describe such an opportunity.
For example, if a hospital’s primary service provider can purchase its own medical equipment at less cost than a competitor, the hospital is able to serve more patients at lower costs than it would if it had purchased the same equipment from a competing firm. The advantage gained by a hospital from its purchase of such an item is not just the price of the item discounted by the price of its competitors, but the fact that it has acquired a cheaper resource in terms of production. In other words, the price of the medical equipment does not reflect the quality of the product itself, but rather reflects the level of production costs that the hospital must incur in order to obtain it.
Such benefits are particularly important in the context of health care. Without these advantages, health care would become extremely expensive, particularly in today’s economy. Even the most successful firms would not be able to compete for market share against an efficient health care provider. When consumers have access to an abundance of providers who can meet their health care needs at significantly lower prices, the consumer gains from absolute benefit.
However, absolute advantage is also important in other economic activity, such as food, because the production process of food involves many factors that may affect the final product. Some factors, such as land, can be more important than others when determining the final price and quality of any food product. Similarly, a firm that has an overwhelming advantage over competitors in the production of certain foods may not always be able to control the costs of production.
Firms also gain an advantage from competition in the sense that it encourages them to innovate and improve their products. Innovation allows firms to create new and improved goods and services at lower prices and with the same or greater quality than their competitors.
The ultimate source of any advantage can change over time; the size of the firm, its size, its location, its number of employees and its size, among other things, can affect the amount of advantage a firm has over its rivals. But, overall, the ultimate source of absolute benefit is still the size and scope of the firm and its ability to generate a competitive advantage. In order for any firm to be able to create a competitive advantage, it must be able to produce and provide consumers with a higher level of value for the price they pay.
Economists have identified a number of factors that affect the ultimate source of absolute advantage, including the firm’s level of competition, its ability to innovate, its knowledge, its size, its number of competitors, its research and development and its level of investment in research and development. While there is no single factor that determines the ultimate source of ultimate advantage, these factors are important in determining the magnitude and extent of an advantage for a firm. In general, a firm with more resources at its disposal tends to produce higher value and more goods and services in less time and in greater quantities than a firm with less resources and less ability to innovate.