Learning Objectives
Students will understand:
- What it meant by specialisation and the division of labour, with reference to Adam Smith.
- The advantages and disadvantages of specialisation and the division of labour in organising production.
- The advantages and disadvantages of specialising in the production of goods and services to trade.
- The functions of money (as a medium of exchange, a measure of value, a store of value, a method of deferred payment.
Content
Intro to Specialisation & Division of Labour
Specialisation: When economic agents are not self-sufficient but concentrate their factors of production on a task to produce specific goods or services and trade the surplus with others.
Division of Labour (DoL): The specialisation of labour. Production is broken down into many separate tasks which are divided up among the workers
Specialisation happens at all levels of economic activity:
- Specialisation within firms (Teachers, teach; Cleaners, clean).
- Specialisation between firms (Ford, cars; Greggs, bakery).
- Specialisation between regions of a country (London, finance).
- Specialisation between countries (Germany, machinery; Columbia, Coffee).
The Pin Factory: Adam Smith’s archetypal description of the impacts of the division of labour.
The pin making process can be split into 18 distinct steps, including the packaging the pins.
Adam Smith visited a pin factory employing 10 men who produced 48,000 pins per day.
If these workers did every step themselves, he reckoned they could each produce 10-20 pins per day.
Therfore the specialisation replaces up to 4,800 pin makers!
Labour productivity (output per person per day) in the factory is almost 500 times that of individual pin makers!
Pros & Cons of the Division of Labour
Pros:
Increased output per worker: People become proficient through repetition of a task.
Improved productivity through “Learning by doing”.
Lower cost per unit: Greater productivity means increased input to output ratio (productive efficiency).
Increases business profits.
Lower prices for consumers: Due to lower costs causing gains in economic welfare.
Consumers like paying less for things.
Increased international Trade: Surplus output can then be traded internationally.
Countries specialize in areas of where they are productive.
This allows citizens to consume a greater quantity and variety of goods and thus be better off. The theory of comparative advantage is key here.
Cons:
Falling productivity: Unrewarding work is repetitive and requires little skill.
Lowers motivation and eventually lower productivity.
Quality issues: Workers may take less pride in their work due to tedious nature.
Absenteeism: Dissatisfied workers become less punctual at work. Costly to firms.
High worker turnover: Many people may choose to move to less boring jobs.
Increase cost of production due to cost of replacing
Little training: Firms have limited incentive to train workers.
Workers may struggle to get new jobs. Unemployment.
Low Choice: Mass-produced standardized goods lack variety for consumers.
Over-reliance: Making only a small range of products can lead to problems.
Linked Articles
See workbook for learning tasks.
Functions of Money
Specialisation requires trade: People can only specialise in the production of one good or service if they can exchange/trade their good or service to fulfil their needs and wants for the goods and services they do not produce.
If people can’t trade their output they won’t have a very good quality of life – most will die!
Bartering: Trading goods and services through swapping one good for another.
But: This is costly as you must spend time searching for people willing to exchange with you.
E.g. A person with a kettle who wants a hammer must find someone with a hammer who wants a kettle.
A double coincidence of wants is required.
Why has money developed? To reduce the costs of exchange/trade from bartering, and thus by encouraging trade it has allowed greater specialisation.
Money: Any item which fulfils the following four functions:
A Medium Of Exchange
A Medium of Exchange: Money can be used to buy goods and services.
This eliminates the requirement of a double coincidence of wants.
People accept payment in money because they know that they will be able to use that money to buy other goods and services.
A Measure Of Value/Unit Of Account
A Measure of Value/Unit of Account: Money allows the value of something to be expressed in an understandable way, and in a way that allows the value of items to be compared.
E.g. If an apple cost £3 and a pen £1, everyone knows and agrees that a pen costs a third as much an apple.
A Store Of Value
A Store of Value: This can refer to any asset whose “value” can be used now or used in the future. This means that people can save now to fund spending at a later date.
Assets that deteriorate would not make good money.
A Method Of Deferred Payment
A Method of Deferred Payment: Money is a unit of account across time, expressing the value of a debt.
E.g. I owe you £10 in a years’ time. That is £10 is understandable now and in a years’ time.
