1.1.5 Specialisation and the division of labour

Contents

Definitions

Specialisation is when individuals, producers or countries produce a specific good or service.

Division of labour is a type of specialisation, involving separating the production process into tasks and allocating the tasks to different workers.

Adam Smith popularised the idea of specialisation / division of labour.

• Adam Smith wrote about the example of a pin factory.
• This pin factory employed 10 workers and produced a total of 48,000 pins per day. In the production process, there were 18 different steps, with each worker assigned to a specific task.
• However if the pin factory workers had to do each of the steps themselves, each worker could only produce 10 to 20 pins a day.
• This shows the benefits of the division of labour. More can be produced with the same amount of inputs, lowering the firm’s cost per unit of output.

Pros and cons of the division of labour

Here is a summary of the advantages and disadvantages of the division of labour:

The advantages of division of labour include:

• Higher productivity, as workers improve their ability at the task through learning by doing.
• As a result of higher productivity, the firm experiences falling costs per unit of output (“average cost”) for firms produced. This leads to higher profits.
• From the workers’ point of view, because of higher productivity, workers may receive higher wages.
• As workers are better trained in their particular task, errors are less likely. So quality of output is likely to rise.

However the disadvantages of division of labour include:

• Greater worker boredom due to repetitive nature of task.
  • This may reduce worker motivation and productivity.
• Less transferable skills.
  • As workers are only learning a narrow range of skills, they may not be able to switch jobs easily.
  • This leads to higher structural unemployment. For example, the worker doing the particular task gets replaced by a machine and the worker cannot do other tasks.
• The production process can stop if only one worker is sick.
  • The production process may be reliant on one particular worker who can do a particular task.
  • However in a system without division of labour, workers can replace one another more easily.
• Means that goods are more likely to be identical due to mass production.
  • Goods may not be tailored to the consumers’ needs either.
  • This reduces variety for consumers.

Similar pros and cons apply to specialisation more broadly.

Pros and cons of specialisation in trade

Countries can choose to specialise in their production of goods and services. For example, the UK specialises to some extent in financial services while Botswana specialises to some degree in diamonds.

The advantages of specialisation in trade include:

• Higher productivity as workers get more experience working in the same sector. Firms can invest in sector-specific capital that boosts productivity.
  • This lowers cost per unit of output and raises total production.
• Related to this, firms can grow in size because of higher global demand for exports, compared with simply selling domestically.
  • This leads to higher exports and greater inflow of funds into economy.
  • In macroeconomics, we could link this to higher aggregate demand and hence higher real GDP.
• Firms, as they produce more, can exploit economies of scale. This means lower long run average costs, or cost per unit of output.
  • An example of this would be as firms produce more output, they may be able to bulk-buy their inputs, such as raw materials, at a cheaper per-unit price.
• Consumers may experience greater choice, as they can import new types of goods from the rest of the world.
  • An example is because of trade, consumers can buy fruits that are only grown in other parts of the world.
• With trade, a country can consume beyond its domestic production possibility frontier.
  • This comes from the theory of comparative advantage, covered in unit 4.1 in macroeconomics. You can read more about this in my article on comparative advantage (coming soon)*.

However the disadvantages of specialisation in trade include:

• Higher imports means the economy is exposed to volatile global prices. If a country imports oil and oil prices rise, the importing country will be worse off.
  • This may also leave the country vulnerable to a deterioration in foreign relations. For instance, if two countries enter a conflict, then one country will not be able to import from the other.
• Higher imports lead to the withdrawal or leakage of funds from the economy.
  • In macroeconomics, we could link this to lower aggregate demand and hence lower real GDP. We can also relate this to the circular flow of income.
• Risk of structural unemployment if an industry fails.
  • If the country relies on one industry and it fails, workers will not be able to move to another industry if their skills are specialised.
• Possibility of diseconomies of scale. Domestic firms could grow too large and see a rise in their long-run average costs.
• Possibility of reduced variety and reduced tailoring to consumer needs, due to mass production.
• Some countries may be specialising in producing non-renewable resources.
  • Examples of this could be countries specialising in commodities, such as fossil fuels or rare earth metals.
  • This may not be a sustainable long-run strategy – what will the country export once its natural resource runs out?

What are the functions of money?

Money has several functions:

• Medium of exchange – money allows firms and consumers to exchange goods and services.
  • For example, consumers can use money to pay for food.
  • Critically, money means that transactions do not require the double coincidence of wants. In a barter economy without money, where people trade say cows for bricks, one party must want the bricks and the other must want the cows.
  • However with money, a consumer can buy a good, without needing to offer another specific good in return – they can pay using money instead.
  • Money as a medium of exchange is therefore critical to enable specialisation. An economic agent can focus on producing one good, sell that good in exchange for money, and then use that money to acquire different types of consumer goods.
• Measure of value – money can act as way to measure value of goods and services.
  • This allows the comparison of the value of different goods and services.
• Store of value – money can be kept and retrieved in the future without losing its purchasing power or value.
• Method of deferred payment – you can consume a good now and pay for it over time with a loan.
  • A common type of loan is a mortgage to buy a house.

These functions are likely to apply to what we think of as money today. For instance, bank notes and bank deposits.

To return to Edexcel Economics A A Level notes, click this button below:

For more A-Level Economics Edexcel A style resources, click the blue button below: