1.1.5

• What does specialisation create?

  The need for money
• Production 


  Is the process by which factors of production are converted into goods and services.
• Production takes place in a firm
• Market forces - refers to supply and demand, which determine the allocation of scarce resources and the relative prices of goods, services, and assets in a market economy
• Adam Smith - ‘the Father of Economics’ . Two theories: Specialisation/Div of Labour and the Invisible Hand (supply &demand)
• Specialisation = where economies, firms or households concentrate on producing goods that they are most efficient at, then trade the surplus.
• Specialisation by Firms often involves the Division of Labour - conveyor lines/ mass production
• When production within a Firm is

  broken down into a series of multiple

  tasks, with each worker specialising

  in just one task on the production line.
• Adam Smith’s famous book

  The Wealth of Nations
• What happens to production scales as a result of specialisation

  Increases - leading to global/ free trade ( trading internationally without tariffs)
• How does specialisation impact cost and production

  • should lead to lower prices
  • As production cost decreases price for consumer should decrease in tandem as well
• Consumer Prices: price you pay for a good or service
• Producer-costs: how much money it takes to produce an item
• Production vs productivity

  production - factors of production converted into goods and services productivity - rate of production (relates to how efficiently we turn factors of production into goods and services)
• Labour productivity

  Output / no. Of workers

  !Output/ worker hour!

  Output / capital employed - capital productivity
• Productivity - more output from the same factors of production or the same output from fewer factors of production
• What does an increase in output from specialisation do? creates a surplus (too much of something) which leads to trade
• Barter: direct exchange of goods or services (swapping)
• Drawbacks of Barter:

  • time consuming
  • an absence of ‘coincidence of wants’
• Why is money more efficient

  • Money is a medium of exchange- medium overcomes problem of ‘coincidence of wants’
  • durable
  • portable
  • divisible
• A medium of exchange

  Exchange the money earned for goods and services
• A measure of value/ unit of account

  Measure of the value generated of a product/service
• A store of value

  Saved and used at a later date
• A method of deferred payment

  money enables people to buy goods/service on credit
• Function of money

  What it does
• Characteristics of money

  Recognisable and acceptable to all Security- difficult to forge. Durable- made from polymer/plastics.

  Divisible - Big and small transactions feasible. Portable
• What does specialisation need to be effective?

  For specialisation to be effective it requires a medium of exchange
• Division of labour = 


  when a task is broken down into sub-

  tasks and labour allocated to each sub-task
• Advantages of division of labour:

  • Labour productivity increases
  • Increases output
  • decreases cost of production
  • increases innovation
  • lower prices for consumers
  • lower training costs
  • increases supply of skilled labour
• Disadvantages of division of labour:

  • Boredom - demotivation, absenteeism, high staff turnover
  • Interdependence can disrupt all production
  • lack of variety and in output - Increased cost in middle a
• What is specialisation?

  The concentration of production on a narrow range of goods and services