Specialisation, Division of Labour and the Functions of Money
Specialisation is when individuals, firms, regions or countries concentrate on producing a narrow range of goods or services rather than trying to be self-sufficient.
Before you start
Make sure you're comfortable with these topics first:
Method
- Define specialisation and give examples at three levels: individual (a worker), firm (produces one type of good) and country (comparative advantage, covered fully in international trade).
- Define division of labour and use Adam Smith's pin factory example, breaking pin-making into around 18 separate operations, to explain how specialising in one stage raises output per worker.
- Explain the benefits of specialisation and division of labour: higher productivity from practice and reduced time lost switching tasks, use of specialised machinery, and workers matched to the tasks that suit their skills.
- Explain the drawbacks: repetitive tasks can reduce worker motivation and job satisfaction, over-dependence on one skill risks structural unemployment if that skill becomes obsolete, and quality can suffer if a worker only ever completes one small part of a product.
- Explain why specialisation requires exchange, and why exchange by barter is inefficient, since it needs a double coincidence of wants where each party must want exactly what the other is offering.
- List and explain the four functions of money: medium of exchange (removes the need for a double coincidence of wants), store of value (wealth can be held and used later, assuming low inflation), unit of account (a common measure to compare the value of different goods) and standard of deferred payment (allows debts and credit agreements to be set in fixed money terms).
- Apply the concepts to a given scenario, e.g. explaining why a barter economy would struggle to support a modern, highly specialised economy.
Worked example
A small tailoring workshop currently has one worker who cuts, sews and presses each garment alone, completing 4 garments per day. The owner reorganises production so that one worker only cuts, a second only sews and a third only presses. Output rises to 20 garments per day using the same three workers. Calculate the change in output per worker and explain, using the concept of division of labour, why introducing this division of labour raised productivity.
- Before: 1 worker produced 4 garments a day, used here as the comparison base of 4 garments per worker per day.
- After: 3 workers together produce 20 garments a day, so output per worker = 20 / 3 = approximately 6.7 garments per worker per day.
- Compare: productivity per worker rose from 4 to approximately 6.7 garments, an increase of about 2.7 garments per worker per day.
- Explain the mechanism: each worker now repeats a single task (cutting, sewing or pressing) rather than switching between three tasks, so time is saved from not changing tools and set-ups, and each worker becomes faster and more skilled through repeated practice at one operation.
- Note the trade-off the workshop now faces: output has risen, but each worker is now dependent on the other two stages being completed, so a delay or absence at one stage, e.g. the cutter, can hold up the whole process.
Practice questions
Try each question, then tap to reveal the answer.
Q1What is specialisation?Show answer
Answer: When an individual, firm, region or country concentrates on producing a narrow range of goods or services rather than being self-sufficient.
Q2What is the division of labour?Show answer
Answer: Breaking a production process down into separate stages or tasks, with each worker specialising in one stage rather than completing the whole product.
Q3Name the classical economist who used the pin factory example to illustrate the division of labour, and the book in which it appeared.Show answer
Answer: Adam Smith, in The Wealth of Nations (1776).
Q4State one benefit and one drawback of the division of labour for workers.Show answer
Answer: Benefit: workers become faster and more skilled at their one task through repetition. Drawback: repetitive tasks can reduce motivation and job satisfaction.
Q5What is meant by a 'double coincidence of wants'?Show answer
Answer: The requirement in a barter system that each party in a trade must want exactly what the other party is offering, at the same time.
Q6List the four functions of money.Show answer
Answer: Medium of exchange, store of value, unit of account, and standard of deferred payment.
Q7Explain why high inflation weakens money's function as a store of value.Show answer
Answer: Because inflation erodes the purchasing power of money held over time, so money saved today buys less in the future, making it a less reliable way to hold wealth.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
Explain two benefits of the division of labour for a firm.
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Evaluate the view that increased specialisation and division of labour always benefit an economy.
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See real A Level Economics past-paper questions, with official mark schemes →
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