Unit 1 Topic 1: The Basic Economic Problem 

To illustrate the division of labour, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin, believe it or not!

 

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located.

 

A complex business like a large manufacturing factory, or a hospital can have hundreds of job classifications.

 

Why the Division of Labour Increases Production

 

When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to do two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

 

First, specialisation in a particular small job allows workers to focus on the parts of the production process where they have an advantage.

People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography and climate—it is easier to be a wheat farmer in rural Western Australia than in Cairns, but easier to run a tourist hotel in Cairns than in the Western Australian wheatbelt. Whatever the reason, if people specialise in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.

 

Second, workers who specialise in certain tasks often learn to produce more quickly and with higher quality.

This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialised workers often know their jobs well enough to suggest innovative ways to do their work faster and better. A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “core competency”) is more successful than firms that try to make a wide range of products.

 

Third, specialisation allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower.

 

The ultimate result of workers who can focus on their preferences and talents, learn to do their specialised jobs better, and work in larger organisations is that society (as a whole) can produce and consume far more than if each person tried to produce all their own goods and services.

 

The division and specialisation of labour has been a force against the problem of scarcity.

 

Trade and Markets Specialisation only makes sense, though, if workers can use the pay, they receive for doing their jobs to purchase the other goods and services that they need.

 

In short, specialisation requires trade.

 

Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialised set of skills and then use the pay you receive to buy the goods and services you need or want. This is how the economy has evolved in modern society.