Specialisation & Division of Labour (AQA A Level Economics)

• Scotsman Adam Smith is often referred to as the 'father of economics.
• He published 'The Wealth of Nations' in March 1776 and explained many fundamental economic principles that we still use today
  
  • The premise of the book was to discuss how to increase productivity and wealth
    
• Based on observations made during a visit to a pin factory, he developed the ideas of specialisation and the division of labour
  • He noted that a single worker could not make more than 20 pins a day as it involved around 18 different processes, such as cutting the wire, sharpening the end, stamping the head, etc.
  • However, if the labour was divided up into different tasks and workers specialised in just that one task, Adam Smith estimated that just 10 workers could produce 48,000 pins per day

Diagram: Worker making steel pins

The division of labour takes one task and breaks it into multiple processes. A worker then specialises in each process and is more productive

• The division of labour is when a task is broken up into several component tasks
  
  • This allows workers to specialise by focusing on one (or a few) of the components that make up the production process and thereby gain significant skill in doing it
  • This results in higher output per worker and so increases productivity
• Specialisation occurs on several different levels
  • On an individual level
  • On a business level. For example, one firm may only specialise in manufacturing drill bits for concrete work
  • On a regional level. For example, Silicon Valley has specialised in the tech industry
  • On a global level as countries seek to trade. For example, Bangladesh specialises in textiles and exports them to the world

Benefits of Specialisation & Division of Labour for Consumers, Firms & Society

Stakeholder	Explanation
Consumers	Lower costs can be passed on to consumers in the form of lower prices Increased variety of goods available due to international trade
Firm	Lower costs can mean higher profits for firms. This may lead to higher wages for workers Higher labour productivity lowers cost / unit for firms, which makes their goods more competitive internationally (exports)
Society	Increased exports can result in economic growth for the nation It creates many low skilled jobs Income gained from exports can be used to purchase other goods from around the world (imports). This increases the variety of goods available in a country

• Prior to the creation of money, individuals and firms had to accept other goods or services as payment, or be self-sufficient by producing everything required

• Often lacking self-sufficiency or driven by the desire for a wider range of goods/services, bartering became the norm but it too had problems

• As individuals and firms trade with each other in order to acquire goods or raw materials, they require a means of exchange that is acceptable and easy to use

• Modern currency fulfils this purpose, & money functions as a medium of exchange, a measure of value, a store of value, and a method of deferred payment

The Four Functions of Money

A Medium of Exchange	A Measure of Value	A Store of Value	A Method of Deferred Payment
Without money, it becomes necessary for buyers and sellers to barter (exchange goods) Bartering is problematic as it requires two people to want each other's goods (double co-incidence of wants) Money easily facilitates the exchange of goods, as no double co-incidence of wants is necessary	Money provides a means of assigning value to different goods and services Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests Without this measure, it is difficult for buyers and sellers to arrange an agreeable exchange	Money holds its value over time (of course inflation means that is not always true!) This means that money can be saved It remains valuable in exchange over long periods of time	Money is an acceptable way to arrange terms of credit (loans) & to settle any future debts This allows producers & consumers to acquire goods in the present & pay for them in the future