ECON 2.1

• Specialisation


  When each worker completes a specific task in a production process
• Adam Smith: 'Through the division of labour, worker productivity can increase. Firms can then take advantage of increased efficiency and lower average costs of production.'
• Pin-making process


  • One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper
• By dividing the production of pins into 18 different tasks, the output of pins could increase significantly
• Specialisation


  • Can be achieved by individuals, businesses, regions of countries or countries themselves
• Advantages of specialisation


  • Higher output and potentially higher quality
  • Greater variety of goods and services produced
  • More opportunities for economies of scale
  • More competition and incentive for firms to lower costs
• Disadvantages of specialisation


  • Work becomes repetitive, which could lower worker motivation
  • More structural unemployment as skills may not be transferable
  • Decrease in variety for consumers
  • Higher worker turnover for firms
• Comparative advantage


  A country can produce a good at a lower opportunity cost than another country
• Absolute advantage


  A country can produce more of a good with the same factor inputs
• Advantages of trade based on specialisation

  • Greater world output and economic welfare
  • Lower average costs due to increased competition
  • Increased supply of goods to choose from
  • Outward shift in the PPF curve
• Disadvantages of trade based on specialisation

  • Less developed countries might use up non-renewable resources too quickly
  • Countries could become over-dependent on the export of one commodity
• Medium of exchange


  Money eliminates the need for a double coincidence of wants in barter transactions
• Measure of value (unit of account)

  Money provides a means to measure the relative values of different goods and services
• Store of value


  Money can be kept for a long time without expiring, although the quantity of goods and services it can buy fluctuates
• Method of deferred payment


  Money can allow for debts to be created, enabling people to pay for things without having money in the present