Economics Notes on Specialisation Money & Financial Markets

Specialisation

  • Specialization: The process by which individuals, firms, and economies concentrate on producing goods in which they have an advantage.
  • Division of labor: Splitting a manufacturing process into a sequence of individual tasks, with each worker performing one specific task contributing to the overall production process.

Advantages of Specialization:

  1. Increased output due to enhanced efficiency.
  2. Lower unit costs resulting from specialization.
  3. Workers can focus on tasks they are best suited for.
  4. Improved product quality.

Disadvantages of Specialization:

  1. Interdependence among workers; absence of a specialized worker can disrupt the entire process.
  2. Workers may experience boredom, leading to decreased productivity and increased unit costs.
  3. Limited skill set among workers.
  4. Risk of unemployment if specific skills become obsolete.

The Role of Money

  • Money: Anything that can be used to make a purchase.

Functions of Money:

  1. Medium of exchange: Generally accepted in exchange for goods and services.
  2. Store of value: Money can be saved for future consumption.
    • Limitation: The value of money may decrease due to inflation.
  3. Unit of account: Money is used to assign value to items (e.g., price of a pen is 22).
  4. Standard of deferred payments: Money allows for borrowing and lending.

Characteristics of Money:

  1. Money does not need intrinsic value (unlike gold or silver).
  2. Acceptability: People accept it as a form of payment.
  3. Durability: It is long-lasting.
  4. Portability: It is easy to carry.
  5. Divisibility: It can be divided into different units of value.
  6. Homogeneity: Every note or coin of the same value should be identical.
  7. Recognizability: It is easily identifiable as money.

Financial Markets

The Role of Financial Markets (Banks):

  1. Provide saving services and pay saving interest.
  2. Make loans to businesses and individuals.
    • Businesses can obtain commercial loans to invest in capital (machines).
    • Individuals can obtain personal loans for consumption.
  3. Facilitate transactions for exchanging goods and services.
    • Banks help process online transactions.
  4. Provide forward markets in commodities and currencies.
    • Customers can buy currency in advance at the current rate.
  5. Provide a market for equity.
    • Banks help public limited companies raise funds by selling shares in the stock market.
    • Banks help investors or customers buy and sell shares.