1.1.5 Specialisation and the Division of Labour (Micro)

Adam Smith Theory

Labour should be divided and that workers should be specialised in one particular section of the labour- to increase the amount of production. Also known as the division of labour.

DIVISION OF LABOUR= where production is broken down into separate tasks

Division of labour can raise output per person as people become proficient through constant repetition of a task

WHAT IS SPECIALISATION

Occurs when countries focus on producing specific goods or services they are best at.

COMPARATIVE ADVANTAGE

A country should produce goods with the lowest opportunity cost.
It’s not about being the best, but about giving up the least to produce something.

SPECIALISATION- BENEFITS

• Higher productivity and profits —> Producing more efficiently means lowers costs and increases profits.

• Surplus for trade —> Specialisation creates extra output that can be traded with other countries.

• Lower prices and higher incomes —> Lower costs mean cheaper goods and higher real incomes.

• Encourages innovation —> Competition from other countries pushes firms to improve.

SPECIALISATION - NON BENEFICIAL

• Overdependence on other countries —> Relying on imports is risky if trade is disrupted. Cheaper imports can also reduce demand for exports.

• Natural disasters —> Disasters can destroy key resources or crops, harming the economy.

• Loss of domestic industries —> Local firms may struggle against cheaper imports, leading to business closures.

• Unemployment —> If demand falls for a specialised industry, workers may lose jobs and struggle to find new ones.

DIVERSE ECONOMY- BENEFITS

• More stability —> Relying on many industries reduces the risk of economic shocks.

• Protects jobs and incomes —> Job losses in one sector can be balanced by jobs in others.

• Supports steady growth —> Growth in different industries helps keep the economy stable.

• Improves living standards —> More stable jobs and growth lead to better incomes and public services.

DIVERSE ECONOMY - NON BENEFICIAL

• Loss of specialisation and efficiency —> Resources are spread across too many industries, so countries don’t fully use comparative advantage.

• Higher production costs —> Smaller industries can’t benefit from economies of scale, so costs are higher.

• Slower productivity growth —> Less focus on key sectors means less investment and weaker improvements.

• Lower international competitiveness —> Firms struggle to compete globally, so exports may fall.

KEY CHARACTERISTICS OF MONEY

•Durability - it needs to last

•Portable - easy to carry around, convenient, easy to use

•Divisible - it can be broken down into smaller denominations

•Scarce - reduce inflation

•Hard to counterfeit - it can’t easily be faked or copied

•Must be generally accepted by a population

•Valuable - generally holds value over time

SPECIALISATION NECESSITIES EXCHANGE

• Specialisation needs exchange —> Firms will only specialise if they can trade their goods for other goods and services.

• Barter system: —>No money is used, goods and services are traded directly.
  —> It is inefficient because people may not want what you offer, so money was introduced.

FUNCTIONS OF MONEY

• Medium of exchange —> Money is used to buy and sell goods and services, making trade easier than barter.

• Unit of account —> Money is used to measure and compare the value of goods and services.

• Store of value —> Money can be saved and used in the future.

• Standard of deferred payment —> Money is used for future payments, like loans and debts.