Specialisation means concentrating the production on a chosen good or service for which a production unit(individual, firm or a country) is more able as far as resources of production are concerned. In other words, it means producing what we produce best.
Specialisation is the production of a limited range of goods, and services by an individual firm or a country, in co-operation with others so that, together, a complete range of products can be produced.
Specialisation also means that the resources are being distributed among small and competing uses at a particular industry or a nation. For example, Maldives specialises in tourism and fishing products, Sri Lanka and India specialises in the production of tea. This is specialisation at national level. The specialisation of Thoddoo island for watermelons and Dhiggaru island for rihaakuru is an example of regional specialisation.
Potential benefits of specialisation
- Higher output: the total output of goods and services will increase and the quality of goods and services produced will increase. A higher output with lower prices will mean more wants will be satisfied with the given amount of scarce resources.
- Variety: consumers have improved access to a greater variety of goods and services and thus, have better choice both from their economy and production of other countries.
- A bigger market: specialisation and international trade increases the size of the market, offering opportunities for large-scale of production for a larger market
- Competition and lower prices: Increased competition for domestic producers acts as an incentive to minimize costs and to be innovative to remain competitive. Competition will help to keep the prices lower in the economy.
Specialisation at individual level involves giving workers individual jobs so that the worker’s capacity to one task in particular will increase. Example, the specialisation of teachers in different subjects in CHSE. Specialisation by individual is called ‘division of labour’. Division of labour refers to the separation of a work process into a number of simple and separate tasks, with each task being performed by a separate person or a group of people.
It is most often applied to systems of mass-production and is one of the basic organizing principles of the assembly lines. Breaking down the work process into simple, repetitive tasks eliminates the unnecessary workers on an assembly line and limits the handling of different tools and parts of different workers. The resulting reduction in the production time and the ability to replace workers, who do repetitive work with simple tools, results in lower production costs and a less expensive final product.
The concept of division of labour was explained by Adam Smith using the example of a pin making factory. He pointed out that a worker will be able to make 20 pins a day if he were to do all the tasks of pin production himself. However, 10 workers working together specialising in the production of pins will produce 48000 pins a day. Hence increasing the production process into a great extent.
According to Adam Smith, “Wealth of nations”, the economic growth(ie. the increase in the value of goods produced in a country in a year) of a county lies in the concept of division of labour. Under this regime, each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that labourers do not have to switch tasks during the say further saves time and money. Ofcourse, this exactly allowed Victorian factories (UK) to grow throughout the nineteenth century and develop themselves and their country simultaneously.
There are many advantages and disadvantages to specialisation, which became common place during the industrial revolution with the creation of factories and the use of division of labour. The work is divided among many different workers and each worker becomes a cog in a large machine.
Advantages of division of labour
Adam Smith recognized that the increased productivity of labour after division happens due to the following reasons.
- Workers become very skillful and effective int their single allocated task. This is because the workers who specialize in a single task have a lot of time and occasion to practice their allotted job. This can lead to increase speed and accuracy and skill in the narrow range of tasks he perform. Workers in a factory who are responsible for only one part of the process become as skilled as they possibly can in that process without the distraction of learning other skills in the other areas. This increases the productivity (output per worker per hour) as well as quality of work done by a worker. Practice makes perfect!
- Another reason is that, time is saved by eliminating the constant need to move from one operation to the next by the worker. They stay or stand in one place. Any capital machinery that they use is also run constantly.
- Some automation (use of specialised machinery) may arise from the division of the general manufacturing process into small, separate and simple tasks. This in turn may greatly speed up the individual jobs which are automated. This effect is caused because once the jobs are broken down into the simplest possible jobs, it becomes much more, apparent to find methods or invent machinery that will save time or increase quality and accuracy of that work.
- It is also generally considered that, because of the cost of training, workers to perform simple tasks is far less than training each worker to complete the whole production process, division of labour can lower average cost of production
Drawbacks of division of labour
Although division of labour can lead to considerable gains in the productivity and quality of production, division of labour can also have negative effects on the production for the following reasons.
- Dependency on the whole labour force is increased with very high level of division of labour. With increased division of labour, the breakdown of one particular machine in the middle of a production line or an absence of a worker can halt the whole production process. For example, a strike in one part of the factory can halt the whole production process.
- It creates the possibility of increased unemployment among the labour force of the country. Very high degree of division of labour can create demand for very specific, narrow skills. This, in turn, may lead to the general workforce acquiring narrow skills. In the long-term, this may lead to unemployment, a type of structural unemployment where the worker is replaced by a machine, and because the worker’s skill is no longer required, the worker has trouble finding employment, because he is not trained in anything else.
- A major drawback of division of labour is, boredom and alienation, which people may experience when carrying out very simple repetitive tasks. This may have a negative effect on the labour force and labour relations and eventually the productivity of the workers.
Individuals are limited in what they can buy because the resources available to them are limited. The societies and countries too are limited in what they can produce with the given amount of resources. Production possibilities curve is a graphical representation of a combination of two goods that a country can produce with a given amount of resources.
Production possibilities curve demonstrates that:
- There is a limit to what the society/individual can achieve, given the existing institutions, technology and resources.
- Every choice the society/individual makes has an opportunity cost – to get more of one good, we need to give up some of another good – every choice has a tradeoff.
Let’s assume that a country can produce either 15000 units of bags of wheat or 15000 units of guns or a combination of two goods with the full employment of all its available resources. The following production production possibilities table shows possible combinations of this country.
|Production of Guns (1000 guns)||Production of bags of wheat (1000 bags)|
This production possibility table shows the opportunity cost of each production choice. It specifies the alternative outputs that can be achieved with different levels of inputs. This information is represented on a curve known as Production Possibility Curve as shown below. The downward slope of the PPC represents the opportunity cost concept.
If all of the economy’s resources such as land, labour and capital were used in producing guns, then 15000 of guns would be produced and none of wheat would be produced.
Alternatively, if all resources were transferred to wheat production, 15000 units of wheat would be produced and none of guns would be produced.
If resources were divided between the two industries, then a range of combinations of production is possible.
To increase production of wheat from 0 to 3000 units, the production of guns must be decreased to 3000. This opportunity cost remains the same even at the other extreme, where increasing the production of guns from 12000 to 15000, it still requires that of guns to be decreased by 3000 units of wheat.
In general, along a production possibilities frontier is a straight line, the marginal opportunity cost is constant, because, the amount of one good we have to give up in order to get the more of the other does not change. PPF is important analytical tool used by economists to illustrate various concepts such as, scarcity, choice, opportunity cost, economic efficiency and economic growth.
PPF and the concept of choice
Different points of PPF denote alternative combination of two commodities that the country can choose to produce. The points from A to F in the above diagram shows this.
PPF and the concept of production efficiency
PPF also illustrates the concept of efficiency. The combination of goods depicted on the curve are attainable only if all the resources are fully employed, with the most efficient means of production possible. All of the points on the frontier such as A and B are said to be productively efficient, because they are fully utilising the economic resources that they have.
If the economy is producing a combination of products on the PPF, then it is productively efficient. However, an economy may be operating within the frontier (for example at the point G in the following diagram), in which case it is productively inefficient. No economy should be operating within PPF because it would be wasting its resources.
This is because it could produce more of both products by using the existing resources effectively. Imagine, you are driving around a country and notice lots of factories that were closing down, high levels of unemployment and shops with very few customers in them; this economy would be productively inefficient. This can be illustrated using a PPF diagram; for example, if an economy produces at point C and not G, then it would be making more of both oranges and sugar canes. Therefore, moving from point G to a point on the PPF involves 0 opportunity cost.
PPF and the concept of scarcity
All of the points in the frontier such as A and B are said to be productively efficient because they are fully utilizing the economy’s resources that they have. This is attractive because the resources are being used properly and not wasted. When an economy is productively efficient, it can only produce an additional unit of one product by producing less of the other product; resource have to be shifted from one product to the other. This happens because the resources available in the economy are limited in numbers – meaning that resources are scarce (i.e the land, capital and the labour in the economy are limited in any given time – and cannot be increased in the short-run)
The point F will be unattainable. This is because the economy does not have the capacity to reach that level of production with the available resources. Thus, PPF shows the concept of scarcity of resources.
PPF and the concept of opportunity cost
Opportunity cost is illustrated by PPF because, along the PPF, to produce more of one good, production of the other good has to be reduced.
At this stage we consider the difference between shapes of the PPC curves. The difference between the different PPC curves depends on the opportunity cost. The linear PPC shows constant opportunity cost and the concave PPC shows increasing opportunity cost.
The above PPF shows that the opportunity cost remains constant as we increase the output of one good. For example, if we increase the production of wheat, from 3000 units to 6000 units, then we lose 3000 (12000 – 9000) of guns. If wheat production is increased from 6000 to 9000, then we lose, 3000 (9000-60000) units of guns once more. (thus an linear PPC will have constant opportunity costs.
However, a typical PPF is bowed to the origin and shows that, as more of one good is produced, an increasing amount of the other is forgone – the opportunity cost rises.
This is because, in reality, some resources are better suited for the production of certain kinds of goods, than for others. The reasoning here is that, when the production of a good requires the use of a resource that is well suited to its production, but poorly suited to the production of the other good (using more verses less fertile land) then, increases in production means that resources that are less and less suitable need to be used. Example, Evan can grow both roses and carnations in his garden. His production possibility is given below. If he is currently producing 110 roses, his opportunity cost of producing 40 more roses is:
|Choice||Number of roses||Number of carnations|
|> 20 carnations|
|> 26 carnations|
|> 31 carnations|
|> 78 carnations|
Each choice is a point on the PPC but taking differences in quantity when moving from one choice to another, we are actually computing the opportunity cost.
As we can see, the straight line PPC curve has constant opportunity cost. This, however, is not realistic as no resource will be totally adjustable for the production of both the goods.
A curved PPC is more realistic as the opportunity cost of diverting resources towards product B leads to a relatively lower increase in the output of the product B and a relatively higher loss of the product A.
The difference between the shapes of the PPCs as we can see from the above examples, depends on the opportunity cost. The negative slope of the PPCs indicate that, in order to increase the output of one good, a country has to reduce the output of the other good.
There are two reasons why economists argue that the PPC must be bowed out.
- The law of diminishing marginal return states that as we add more and more resources(variable factors in the short-run) to a particular factor (fixed factor), the output will, at first, increase and then eventually decrease.
- Not all resources are equally suitable for all the industries. If resources are transferred from good A to good B, initially the resources to be transferred will be those resources that are more suitable and efficient for B, and those which could be the least efficient for A. Later, as more of good B needs to be produced, the resources that may be very efficient for good B and not so efficient for the good B may also have to be transferred. In this situation the economy loses on both sides. That means the economy is usually inefficient on both ends of the PPC curve while it is the most efficient when resources are appropriately allocated for both the goods according to their suitability, which makes the PPC bowed out.
PPC and the concept of economic growth
Economic growth refers to an increase in the output of goods and services produced in an economy. The usual measurement for growth is GDP. An increase in Real GDP is therefore considered as economic growth.
Economic growth can take place in two ways:
– In the short-run, if the economy uses more of its unemployed resources, then it will be able to produce more goods and service. This is known as short-run economic growth. In this case, growth can be illustrated by a move from point D to any point on the PPC such as A,B or C. Such a move does not have any opportunity cost as the economy is not efficient at D.
– The shifts of the PPC outwards are known as long-run economic growth. Once attaining the output to the level of PPC, that is any point on the curve, an economy can produce more of both products only by shifting the PPF curve outwards. This means, increasing the amount of both products that can be produced with the economy’s resources. This is what happens over time when an economy grows. Economic growth enables more goods and services to become available to consumers.
An outward(rightward) shift of the frontier might be due to:
=> More training of employees, enabling them to be more productive;
=> Greater investment in in capital goods such as machines and equipment;
=> An increase in the population size, for example, through immigration;
=> Improvements in technology, providing better ways of doing thiings;
=> Discovery of new resources.
Sometimes improvements could happen only in the production of one product, while the other product could remain the same. For example, if technological improvement is specific to one sector, but not the other, then then the effect will be biased. This will rotate the PPC outward, but only in that specified area.
For example, if the improvement in technology only in the cheese production sector, the PPC will shift outward only from the cheese production output, while the steel output will remain the same.
While PPC can move outwards as mentioned above, it can also move inwards for the opposite reasons. For example, man-made and natural disasters can shift or rotate the PPC inwards.
Contributor: Mohamed Aseel(currently a student at CHSE)
Communist countries were known to have centrally planned economic system. However, communism collapsed in the late 1980s. The countries of the former soviet union (known to have had communism), after their independence, began to move away from central planning towards market system, and thus became mixed economies. Economies which are in the process of moving away from soviet-style central planning to market system are called ‘transition economies’.
Transition economies undergo a set of structural transformations intended to develop market-based institutions. These include economic liberalization, where prices are set by market forces rather than by a central planning organization. In addition to this trade barriers are removed, there is a push to privatize state-owned enterprises and resources, state and collectively run enterprises are restructured as businesses, and a financial sector is created to facilitate macroeconomic stabilization and the movement of private capital.
However, the transition process has its own pains and problems.
Problems of transition when central planning in an economy is reduced
- Rising unemployment
Transition process involves in privatisation of firms. The newly privatised firms face competition from other firms, and thus try to be efficient. This also means that they will no longer employ workers more than what is needed and the firms also may try to shift too capital-intensive production methods. Transition also means that the government also will not employ as much as before. This will create unemployment at least in the early stages of transition. Whether the country will be able to solve will depend on its success in the transition process.
- Rising inflation
Many transition economies also experienced price inflation as a result of the removal of price controls imposed by governments. When this happened, the newly privatised firms began to charge prices that reflected the true costs of production. In addition, some entrepreneurs exploited their position and raised prices in an attempt to profit from the situation.
Transition economies probably had a fairly equal distribution of wealth(atleast in the theory) among the people. However, when the central planning is reduced, inequality tends to increase as as some exploited their position as entrepreneurs and traders in commodities, while others suffered from unemployment and rising inflation.
- Corruption and consumer abuse
As the economy starts the transition, the legal system is usually not adequate to prevent corruption. Loop-holes in the legal system would mean that the markets are not properly regulated to protect consumers. Market-driven economies will only develop when citizens are granted extensive property rights, and can protect these rights through the legal process. This was largely absent in the former communist transition economies.
As the countries try to allocate their resources, they are faced with the questions of what, how and for whom to produce. The answer to these questions determine what type of an economic system a particular country has.
Market Economies is also known as capitalist economies. In this type of economic system, the questions facing the economy is answered by the forces of demand and supply.
What to produce – What the customer demands.
How to produce – By private companies, the companies decide the most efficient method and competes with each other to win customers.
For whom to produce – The production is done for those who demand. It is for the customers willing to pay money to buy the produced goods and services.
Price/ market mechanism which manipulates the allocation of resources or tries to resolve the three fundamental questions of what, how and for whom to produce. In other words, resources are allocated through changes in relative prices. Adam Smith referred to it as the “invisible hands” of the market.
Producers aim at profit maximisation and rely on higher prices as a “green signal” to higher production. The foundation is the profit motive. Evidently, the production of those commodities will be more profitable which are demanded more by consumers. There is freedom of choice for producers and consumers.
Everyone in a market economy acts in self-interest. The factors of production are owned by private individuals and companies. Government has a very minimal role in the production.
Advantages of market system
- Market system automatically responds and adjusts to the people’s wants
As we know, in a market system, the price of goods and services are determined by the forces of demand and supply. If consumers want a particular good or a service, they simply demand for it and the prices go up, which gives signal for the producers to produce more of that good. If producers can produce the required amount of that particular good, the price automatically comes down to normal. Likewise, if people no longer wants a particular good, they simply stop demanding for it, so that it is no longer profitable for producers to produce that good, so producers stop producing that good.
- Wider variety of goods and services
In a market system, producers compete with each other by offering wider variety of goods, therefore consumers have more choice, this may even lead to lower prices.
- Competition pushes businesses to be efficient: keeping costs down and production high.
The aim of firms in a market economy is to make as much profits as possible. In order to do this, the firms need to be more efficient. Therefore they often use new and better methods for production, this leads to lower costs and higher output.
- Government does not have to take decisions on basic economic questions
The market system relies on producers and consumers to decide on what, how and for whom to produce. Therefore it does not require the government to employ a group of people to take these decisions
The disadvantages of market system
- Factors of Production is not employed if it is not profitable
In a market system, producers do not produce a good or a service if it is not profitable. But sometimes it may be necessary to produce some goods even if it is not profitable. Therefore Market system will fail in this aspect.
- Market system may not produce certain goods and services
Private firms in a market system will not be willing to provide certain public goods like street lights because it is almost impossible to charge any payment from the consumers.
- Free market may encourage harmful goods
If there are people in the market who wish to buy dangerous goods like narcotic drugs, the market will be ready to buy it since private firms will be willing to provide anything that is profitable
- Production may lead to negative externalities
When firms are always trying to maximize their profits, they may ignore external costs like damages to the environment.
- Free market economy may increase the gap between the rich and the poor
When firms and individuals are able to produce and consume freely, it may make the rich even richer because they have more decision making power, and the poor may become poorer because they have less decision making power in the market. The market system allocates more goods and services to those consumers who have more money than others.
- Cyclical fluctuations
Cyclical fluctuations are caused by the ever-changing demand and supply conditions. Sometimes, when producers anticipate a rise in demand for certain goods, they raise investment to produce more. But if demand actually does not rise, a general glut will occur, that is, stock accumulation. Consequently, the affected producers will have to reduce investment, dismiss workers toreduce costs. Both of these have an adverse effect in the economy as a whole. Less investment meanslower production while lower employment means less consumption, lower prices and profits. These cumulative effects lead to a lower national income.
Conclusion: It can be concluded that price mechanism determines allocation of resources as per what consumers want more, which initially sounds right. However, this system cannot be left to itself because of its various imperfections which undoubtedly necessitate government intervention.
In this type of economic system, the government answers all the basic economic questions. Let’s see the typical answers to those questions by the government:
What to produce – The government decides what will and must be the needs of the citizens. The ans could be to produce only ‘Dettol’ soaps and no other variety of soaps. Citizens have no choice but to accept it.
How to produce – The government decides the method of production. A typical answer by a command economy could be to produce it in a labour intensive factory owned by the government.
For whom to produce – Again the government decides who will consume the products. Yes the answer is that the production is done for the people, so the people will use it and everyone gets the same price. Welfare is supposedly maximized.
Government controls everything. The factors of production are all owned by the state and production is done for the welfare of the state. And of course the choice of goods available to the people is much less, the people have to accept what is produced. This type of economic systems are also known as ‘planned economies’.
Advantages of command economic system
- Since this system is centralized and directly under the control of the government, it is stable and safe for investors. There are standards laid down by the government which have to be followed by every investor and thus, it helps to establish more control.
- All individual efforts are focused towards a certain goal, which means that all the efforts can be concentrated towards achieving social and economic goal of the government.
Since this system is stable, long term financial projects and infrastructure can be made without the fear of market downturn.
- Citizen welfare (at least in theory) is the main agenda of the government. Thus this kind of economy looks forward to maximizing citizen welfare. Gap between the poor and the rich are lower than any other type of economic sytem
disadvantages of command economic system
- In planned economy, planners are not always aware of consumer preferences, shortages, and surpluses with accuracy and therefore, cannot manage production accordingly.
- This type of economy requires many planners and administration to run the system which results in slow decision making, less progress, and corruption.
- There could be unemployed labour and other resources which leads to waste of labour and resources that could have otherwise been used to fulfill other needs of the society.
- As the system allows very little freedom, there is not much room for innovation. If the state allocates employment, then people are left with very fewer options to choose from.
- The government companies are highly bureaucratic and inefficient in operation.
Sometimes there is under-production of certain products while over-production of unnecessary products.
In a mixed economy, there are features of both the market and command economies. Some of the factors of productions are owned by the government, while others are owned by private sector. Almost all the economies today are mixed economies, however the degree of mixing varies. Some are more market oriented, while some are more towards government planning.
The price is primarily determined by the market. The government can regulate the market to correct the market failures.
- This system overcomes the disadvantages of both the market and planned economic systems.
- Producer and consumer sovereignty: Both consumers and producers can choose what to produce and what to consume.
- The government can always correct the market in case of the market failure
- Best and efficient allocation of resources takes place due to the resources being allocated by the market forces, with the government doing the necessary regulations. Government will provide those goods and services which the market forces will fail to provide (public and merit goods)
- The monopolies and other practices can always be regulated.
Meaning of Economics
One of the most quoted definitions of Economics today is perhaps, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”. This Definition was given by Lionell Robbins in 1935.
If we put in simple words, Economics is the study of human bahaviour in relation to their wants. It studies how human beings manage their scare resources in trying to satisfy their wants.
Scarcity means limitation of the availability of resources in relation to their wants. That means the available resources are not enough to completely satisfy all the wants.
By now, you must have already learnt that human beings have unlimited wants. And as the resources with which these wants must be satisfied are limited, we can understand that ‘scarcity’ is the central economic problem of everyone including individuals, firms and the government, and even the whole world.
If we decide and choose which want to satisfy with the available resource, then there are other wants we have to leave unsatisfied. We have to forgo something in order to satisfy a want. The want that is forgone is called the ‘opportunity cost’. It is also known as ‘the next best alternative’.
The concept of scarcity, choice and opportunity cost can be shown in many ways, at different levels. For an individual, it may involve choosing the best from the choices available. For example, a student may have to choose between doing A levels and going for a diploma right after finishing O levels. Choosing one option means the other option has to be forgone.
A firm may have to choose between different production methods.
A government may have to choose between different development projects.
Inevitability of choices
Each and every level of economic agent (individuals, firms or government) has to make the choices as all of them are confronted with central economic problem (scarcity). Governments have to decide on the best possible way to allocate resources (example – where and what kind of factories must be built), the firms have to decide how to maximize profit (what is the most efficient way to produce goods) and individuals have to decide how to maximize their welfare (which goods will give them most satisfaction). In the process of making this choice they have to give up other alternative so the concept of opportunity cost is applicable for each and every level of economic agents.
The basic economic questions
There are some basic questions faced by every society. How they are answered depends largely on the type of economic system the country has. The questions are:
- What to produce?
- How to produce?
- For whom to produce?
What to produce primarily depends on consumers in free market. The consumers choose the product they like and thus their choices direct the types of production that should be carried out. The firms will follow this because this is the most profit maximizing combination.
Sometimes the government too can decide what to produce. The government may decide to produce an essential good or service which everyone ought to have.
This question will be answered by those supplying the goods and services. If the supplier is a private firm, it will seek to use the method which will give the maximum profit. For example, production can be done using labour intensive method and capital intensive method. The private firm will decide on the method which will give lowest average costs.
If the government is the supplier, it may try to use the method which promotes welfare of the society rather than maximising the profit.
For whom to produce will also depend on the suppliers (government and private firms). The consumers are the target of production, but the kind of consumers the firm or the government wants to target is the question. The government usually produces for the general public where as the private firms can seek to maximize profit by producing for the high and rich level customers as well as the general public. In simple words, the production is done for those who are willing to pay.
Note: among the suppliers, there will also be private individuals(sole traders). Their objective in production is the same as that of the private firms – that is, to maximise profit.
short run, long run, very long run
In the perspective of an individual firm, the short-run is when at least one of its factors of production is fixed. Therefore, there will be a limit to the extent to which it will be able to respond to an increase in price.
However, firms will try and increase their capacity by increasing all their factors of production, which means all the factors of production can become variable. This is known as the long-run. Therefore, the long run is the time which is taken by a firm to change all of its factors of production.
In the very long run, not only all of a firm’s factors of production are variable, but also all the inputs which are beyond the control of the firm. During the very long run, not only are the labor, capital, land, and entrepreneurship inputs variable, but so too are key production inputs such as government rules, technology, and social customs.
Next Topic: Different allocative mechanisms
- Scarcity, choice and opportunity cost
- Ceteris paribus
- The margin: decision making at the margin
- Resource allocation in different economic
- Problems of transition
- Production possibility curves
- Positive and normative statements
- Factors of production: land, labour, capital, enterprise
- Division of labour
- Money: its functions and characteristics
- Classification of goods and services
- Externalities and Market Failure