An individual has a comparative advantage when they can produce a good at a lower opportunity cost than another person. Opportunity cost is the value of the best alternative given up to engage in an action. Specialization based on comparative advantage allows a greater quantity of goods and services to be produced. D. Economic Coordination and the Market System 1. Coordination of economic activity in a market system relies on voluntary exchange.
Voluntary exchange occurs when all parties to the exchange expect to benefit.
There are several conditions that must hold if trade is to be voluntary. Both parties must be responsible individuals who can make rational decisions. Both parties must have reasonable access to information. Both parties must have reasonable options to the exchange. The beneficial effects of voluntary exchange may disappear if there is an adverse neighborhood effect associated with the exchange.