Specialisation, division of labour and exchange

• Specialisation


  Each worker completes a specific task in a production process. This theory was proposed by Adam Smith.
• Division of labour can increase worker productivity, therefore there is increased efficiency and lower average costs.
• Advantages of division of labour and specialisation:

  • higher output and quality, since production focuses on what people and businesses are best at.
  • variety of goods and services can be produced
  • more opportunities for economies of scale; therefore market size increases
  • there is competition so this gives an incentive for firms to lower their costs, which helps to keep prices down
• Disadvantages of division of labour/specialisation:

  • Work becomes repetitive; can become demotivational to workers and the quality of goods and productivity will be affected. This dissatisfaction may lead to workers leaving their jobs.
  • Increase in structural unemployment, since skill sets may not be transferable.
  • Variety could be affected due to the specialisation in producing one type of product of a good in the market/at a location.
• Specialisation to trade


  Countries can specialise in the production of a certain good or service. E.g. Norway is one of the largest exporters of oil.
• Countries trade to get the goods and services they are unable to produce.
• Countries can exploit their comparative advantage in a good or service, which means they can produce a good at a lower opportunity cost to another country.
• Absolute advantage


  When a country can produce more of a good with the same factor inputs.
• Advantages to specialisation to trade:

  • Greater world output, therefore gain in economic welfare
  • Lower average costs, since market becomes more competitive
  • Increased supply of goods to choose from
  • Outward shift in PPF
• Disadvantages of specialisation to trade:

  • Less developed countries might use up their non-renewable resources too quickly, making them run out.
  • Countries could become over-dependent on the export of one commodity. If the supply or the price of that good decreases, then the economy would suffer.
• Function of money:

  1. medium of exchange
  2. measure of value
  3. store of value
  4. method of deferred payment