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Specialisation and the division of labour

a) Specialisation and the division of labour

Specialisation - when a producer concentrates on the production of one or a limited range of goods or services (KEY DEFINITION).

If specialisation is adopted by the majority of economic agents, they must trade with each other in order to meet basic needs.

Division of labour - when parts of the workforce become specialised in a component of the production process (KEY DEFINITION).

Economic theory dictates that if all of the factors of production will specialise, they should each specialise in the task that they are most capable at doing. This maximises efficiency, as everything is contributing in the way that it knows best how to. This links back with 1.1.4 nicely, whereby if this rule is followed we move closer to the PPF curve as we are maximising productive potential.

Adam Smith

Perhaps one of the most influential economists of all time, Adam Smith was the first to discuss the concept of division of labour in his book 'The Wealth of Nations', published in 1776. Having visited a pin factory, he said that by his estimates one worker completing all of the necessary tasks to make the pins themselves could produce at most 20 in one day. However, he suggested that by splitting up the production process into 10 stages, the output per worker per day would be 4800.

Using this example, Adam Smith showed by using division of labour, labour productivity rises, therefore increasing efficiency, lowering the cost of production as losses are reduced, and increasing quality as workers become better at their individual tasks.

b) Advantages and disadvantages for their use in organising production


  • Labour productivity will rise if used. This is because as the factors of production specialise in the tasks they are most capable at, efficiency is higher compared with the alternative of anyone doing any job. Also, concentrating on one thing allows for skill to develop quicker. 

  • Because each person is specialised in a part of the production process, they become better at it over time. This increases the quality of the goods and services produced.

  • Productivity also rises as there is less time wasted moving between jobs, since everyone only has one job to do.

  • There is less time and money spent on training, since there is a clearer understanding of who needs to be trained how to do which tasks.


  • If workers are completing the same task over and over again, this leads to boredom, ultimately worsening labour productivity and quality in the long run.

  • The increase in mechanisation associated with specialisation and division of labour leads to more standardisation (as the same capital produces similar good and services), and so less craftsmanship.

  • Over-specialisation is when we become too dependent on specialised workers. This can lead to reductions in supply if specialised workers retire and cannot be replaced fast.

  • Over-specialisation across a region can worsen the effects of structural unemployment should a sector of the economy close down.

c) Advantages and disadvantages for their use to produce goods and services to trade


  • Comparative advantage states that economic agents should specialise in the making of goods and services with the lowest opportunity cost of production. This is a more allocatively efficient process as agents produce things they know best how to, therefore opting for the option with the highest labour productivity. If all agents adopt this idea, output will grow globally more so than any alternative. Political economist David Ricardo first proposed this concept in 1817. 


  • Over-dependency on the production of one good or service results in worsened economic consequences should demand for that product fall significantly. Effects include a deeper recession, greater structural unemployment, etc. This is what happened in Northern UK cities in the 1980's, when the global shift in manufacturing towards Southeast Asia resulted in the closures of coal mines.

  • Specialising in the exporting on non-renewables will eventually result in negative economic consequences, as these commodities will run out in the long run. For example, Saudi Arabia specialising in exporting oil.

  • Higher interdependence leads to worsened effects from supply-side shocks. For example, the Russia-Ukraine War reduced wheat exports across the world, causing mass inflation in the UK for groceries.

d) The functions of money

Because countries began to specialise, a common good was required that was valuable to everyone and so provided incentive to produce goods and services and trade them with other countries. Barter was used previously, whereby goods and services where traded for one another directly. However, this was not the most effective system to use as it created an unbalanced trading system as there were no defined values for exchange (nowadays in the UK barter can be illegal if the potential tax implications are not considered). Also, it required a double coincidence of wants, meaning that both parties had to believe that what they were receiving was of equal or superior value. To solve some of these issues, money became commonplace, serving multiple functions.

A medium of exchange - it's main use is to buy and sell goods and services. Because it can be used anywhere and for anything, there is always an incentive to trade as money provides the option to buy other goods or services in the future.

A measure of value - it can be used to compare the values of different goods and services.

A store of value - it can keep it's value for long periods of time. However, inflation means that it's value will slowly fall over time.

A method of deferred payments - Money has allowed for the creation of debt, whereby things can be payed for in the future should you not be able to pay for them in the present. This debt is often to be re-payed with interest.

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