Adam Smith

### Adam Smith and the division of labour

- **Division of Labour occurs when workers specialise on specific tasks**. For example, **work is divided up into many smaller tasks** so that **each worker is responsible for a small part of the overall product** being produced.

- In “The Wealth of Nations”, the economist Adam Smith set out the view that **economic growth could be achieved by increasing the division of labour**.

- Smith **argued that through specialisation and the division of labour, extra wealth could be created** for firms and economies alike (*Smith suggested entire countries should specialise in specific goods and services to improve their wealth*).

- **An example Adam Smith used was of a pin factory** where each worker performed different tasks (*i.e. one worker made the pin heads, another made the bottom etc.*)

### Advantages and disadvantages of specialisation in production

- ****************Advantages****************

- \*\*Increased output\*\* - \*\*Skill is developed\*\* as a result of the repetitive nature of specialisation on the divided tasks, therefore \*\*increasing each worker’s efficiency\*\* at producing the product.

- \*\*Less waste\*\* - \*\*As workers become more skilled, less waste is produced\*\* as there less likely to make mistakes.

- \*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*Lower costs per unit\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\* - The \*\*economies of scale gained from the increased output\*\* could cause overall unit costs to decrease, allowing \*\*bulk discounts\*\* to take place.

- **Disadvantages**

- \*\*Exhaustion/boredom\*\* - The \*\*repetitive nature of the tasks\*\* may cause workers to become bored and therefore less satisfied at their job. This could result in \*\*workers demanding more pay to compensate,\*\* or, \*\*lower employee retention\*\* - resulting in an increase in recruitment costs for the firm.

### Advantages and disadvantages of specialising in producing specific goods

- ****************Advantages****************

- \*\*Greater output\*\* as \*\*efficiency can be optimised\*\* internally within the firm/economy.

- \*\*Greater variety within the goods sold\*\*, e.g. pickup trucks are a variant of cars and can be produced despite the firm manufacturing cars as a specific good.

- \*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*Economic growth\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\* - Allows for \*\*greater quantity of the good to be produced and therefore traded within the economy\*\*. Economies can therefore trade these with other countries to increase their exports (and increase GDP / create economic growth)

- **Disadvantages**

- \*\*Competition\*\* - \*\*\*\*If \*\*another firm/economy becomes better at producing said good\*\*, the economy may be unable to complete and would result in a \*\*decrease in trade\*\* (causing a recession).

- \*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*Reliance with other firms/countries\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\* - Specialisation can cause countries to become reliant on other countries for resources to produce their specialty products. However, \*\*if an issue affects the supply chain\*\* (\*e.g. weather/war\*), they may be \*\*unable to produce their good\*\* and therefore trade would fall.

- \*\*Changing tastes/fashions\*\* - People may want to \*\*trade less of a product if it becomes unpopular\*\*.

- \*\*Finite resources\*\* - \*\*Unit costs may rise\*\* if the supply of the raw materials are finite / Will eventually become \*\*unproducible\*\*.

### The functions of money

- **A medium of exchange** - Money allows people to **buy goods in exchange for money** (therefore removing the need for bartering / trading goods for goods, which previously caused issues when goods had subjective value between people in an economy).

- **A measure of value** - Measure of value, as it is **less subjective than material goods**.

- **A store of value** - Money needs to hold its value to be able to be exchanged for goods, and **exchange rates help determine the quantity of goods/services that can be bought** with a currency.

- **A method of deferred payment** - People are able to **use money to buy material goods without having enough money presently**. This can be done through the creation of **debt**. E.g. mortgaging a house, which would otherwise not be available without money.