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Opportunity cost refers to the cost of giving up the second-best alternative. In making economic decisions, certain economic cost is involved because of limited resources and alternative uses.

Absolute advantage can be defined as the ability to produce a product at a lower cost or to produce more units at the same cost. For instance, if person A takes 8 hours to make a piece of cloth and person B takes 9.5 to produce the same cloth, then person A is said to have an absolute advantage.

Comparative advantage can be defined as the ability to produce a product at a lower opportunity cost than others. For instance, to do farming person A has to give up another activity that could have earned him $100. Person B has to give up a job that could have earned him $50. Then person B is said to have a comparative advantage in farming.