Print bookPrint book

Specialisation and the division of labour

Site: Beverley High School
Course: Edexcel Economics - Theme 1: Introduction to markets and market failure
Book: Specialisation and the division of labour
Printed by: Guest user
Date: Sunday, 5 May 2024, 5:09 AM

Table of contents

1. Specialisation

In order to solve the economic problem, markets employ a key process enabling them to allocate resources efficiently - that of specialisation.

In order to produce efficiently factors of production need to be combined in an efficient way, and be provided with an incentive to encourage efficiency. Factor incomes provide the key incentive in a market economy - these are wages, rents, interest and profits. Factor owners act in their own self-interest in order to derive this reward.

To make profits the entrepreneur must combine the other factors in an efficient way. In terms of using scarce resources, it is most efficient for factors to specialise in producing perhaps just one element in the production process. When applied to labour, specialisation is best achieved through a division of labour where large scale tasks are broken down into smaller ones so that individuals can become specialist at just one or a few tasks. Over time, factors can become more specialised. This is the essence of a market economy. Specialisation can be applied not only to factors of production, but also to firms, regions of a country and whole nations. Indeed, as specialisation increases so does the need for exchange and trade. As Adam Smith, the founding father of economics, noted in the 18th Century, specialisation and the division of labour form the basis of the wealth of all nations. Smith also noted that free trade became essential if specialisation was to be successful. This meant that countries would need to trade freely to gain the benefits of specialisation. As an example, he famously referred to wine making in Scotland when he said

‘..by means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?`


2. Advantages and disadvantages of specialisation

Firms
Specialisation provides the following benefits to firms.

Benefits
Firms can:
1. Focus on their core markets.
2. Gain from more efficient uses of scarce resources.
3. Improve the quality of their products.
4. Cut down on waste.
5. Speed up production.
6. Become more competitive.
However, specialisation also has some disadvantages.

Costs

Firms may suffer from:

1.  Over-specialisation, when a change of tastes or preferences results in a fall in demand

2.  If a manufacturing process relies on many complex machines all specialising in a small aspect of production, any breakdown in machinery would cause the whole production line to stop.

Workers

Similarly, specialisation also creates some costs and benefits to workers, including:

Benefits

 1.  Development of more skills which deepen the value of human capital.

 2.  Labour can become more productive.

 3.  Workers can be more effectively rewarded.

 4.  Skills can be transferred from job to job.

Costs


However,

 1.  Workers can experience boredom from monotonous and repetitive work.

 2.  Productivity can fall as a result.

 3.  Workers risk unemployment if demand for their skills falls.


3. Barter systems

Early societies often relied on a barter system to enable goods and services to be traded. Indeed, the earliest forms of market were established to allow producers to exchange their products directly for other products. Evidence suggests that barter systems were widespread around 8,000 years ago. However, the evolution of acceptable mediums of exchange, such as salt, gold and silver gradually replaced trade by barter.

Money as a medium of exchange

The problem of exchange through bartering

Money occupies a central role in market economies because it acts as a medium of exchange. The advent of money replaced the need for exchange through barter and enabled producers and factor owners to specialise. For example, without money, a hairdresser would have to accept another good or service as direct payment for a haircut. However, if the hairdresser is paid in potatoes, it means that he or she must pay for the services of an assistant in potatoes, as well as pay his or her suppliers in potatoes. However, what if another client wants to pay in rice, and yet another in wheat? What is a haircut worth in terms of rice or wheat? Ex-change is most likely to occur when a single medium of exchange is accepted by everyone. Exchange through barter is very difficult, and barter economies tend to remain extremely undeveloped because direct trade is difficult.

Money allows complex trade and exchange

Money is any asset that is generally accepted in the settlement of a debt incurred in an exchange. For an asset to be widely used as money, it must have certain properties, including that the asset is portable, divisible, durable and stable in value. Some assets fulfill the role of money much better than other ones. Potatoes, for example, would not make a good medium of exchange because they are not durable, nor do they have a stable value. Throughout history, gold and silver have frequently been used as money, given their divisibility into bars and coins.

The introduction of paper money by the Chinese in the 9th Century AD marked a significant development in the evolution of money, especially given the ease with which different denominations could be created, and the portability of paper money in comparison with gold or coinage. It is said that the Chinese invented paper money because there was a shortage of metal to make coins.

In more recent times the invention of cryptocurrencies, such as Bitcoin, and new online payment methods has created new opportunities to exchange. What is clear that the evolution of money as a medium of exchange, and as a store of wealth, had a considerable impact on the development of modern commerce, international trade, and global prosperity.