2.1 Specialisation and Trade

• Market


  A set of arrangements that allows transactions to take place
• Market


  • Where or when buyers and sellers meet
• Markets

  • Have a physical place or some mechanism whereby buyers and sellers can meet or contact each other
  • Have a willingness to trade or exchange goods and services (usually using money)
  • Are competitive and are driven by the price system
  • Prices invariably fluctuate
• Sub-markets


  A recognised or distinguishable part of a market. Also known as a market segment
• Market system


  Works on the basis of demand and supply
• Signalling function of the market


  The market sends signals to both parties (buyers and sellers) in the market
• If the price falls


  1. This signals consumers that the product is relatively cheap and they are likely to increase their purchases

  2. Signals suppliers that the price of the product has fallen and to remain competitive they will have to reduce their prices
• Functions of price

  • Allocation
  • Rationing
  • Signalling
  • Incentive
• Medium of exchange

  For a market to function efficiently we need a medium of exchange
• Double coincidence of wants


  The problem with a barter system is that you need a double coincidence of wants
• Money


  The importance of money as a medium of exchange
• Functions of money

  • Be acceptable to both buyers and sellers
  • Act as a store of value
  • Be a unit of account
  • Be a standard of deferred payment
• Division of labour

  If workers specialise in a task, the production process can be broken down into a series of separate processes
• Specialisation


  The concentration by a worker or workers, firm, region or whole economy on a narrow range of goods and services
• For the Division of Labour to be effective


  Specialisation must take place
• Levels of specialisation


  • Within extended families
  • Within businesses and organisations
  • In a country
  • In a region of a country
• Benefits of specialisation

  • Higher output
  • Variety
  • A bigger market
  • Competition and lower prices
  • Exchange between developed and developing economies
• Advantages for a country specialising in goods and services to trade


  • Allows a country to make full use of their economic resources

  Increases the scale of production - leads to lower costs and prices

  Surplus can be exported, an injection into the circular flow of income
• Disadvantages for a country specialising in goods and services to trade


  • World prices for a product might fall leading to declining revenues

  Risk of over-specialising and structural unemployment

  Might lead to over-extraction of a country's natural resources
• Specialisation

  Can be shown using a PPF diagram where an individual or country can increase its efficiency and achieve a point above its current productive potential
• How specialisation may help address the basic economic problem


  • Higher output: A higher output at lower unit costs means more wants and needs might be satisfied with a given amount of scarce resources

  Variety: Consumers have improved access to a greater variety of higher quality products, i.e. they have more and better choice both from their own economy and from the production of other countries

  A bigger market: Specialisation and international trade increase the size of the market offering opportunities for economies of scale

  Competition and lower prices: Increased competition for domestic producers acts as an incentive to minimise costs and innovate to remain competitive. Competition helps to keep prices down
• How division of labour may help address the basic economic problem

  • Division of labour can help to raise output per person, thereby reducing costs per unit because lower skilled workers are easily trained and quickly become capable through constant repetition of a task – "practice makes perfect" – or "learning by doing"

  Low unit costs allow firms to remain competitive in the markets in which they operate
• How division of labour may not help address the basic economic problem

  • There are limits to the breaking down of production into many small tasks. Perhaps the greatest is that the division of labour may eventually reduce efficiency and increase unit costs, because repetitive work lowers worker motivation and productivity. Workers begin to take less pride in their work and quality suffers.

  The division of labour also runs the risk that if one machine breaks down (or an individual is absent) then the entire production process stops.

  Some workers receive narrow training and may not be able to find alternative jobs if they find themselves out of work (they may suffer structural unemployment).

  Another disadvantage is that mass-produced standardised goods tend to lack variety.
• Disadvantages for a firm and/or country specialising in goods and services to trade


  • Risk of worker alienation

  Risk of disruptions to production process

  Risk of structural unemployment due to occupational immobility

  World prices for a product might fall leading to declining revenues

  Might lead to over-extraction of a country's natural resources