Specialisation and the division of labour allow economic agents to focus on specific tasks in the production process and trade surplus goods with others. This increases productivity and output. Adam Smith observed workers in a pin factory where labour was divided into 18 steps, finding productivity increased 500 times over individual pin makers. While specialisation provides benefits like lower costs and prices, it can reduce worker motivation from repetitive tasks and lead to quality and turnover issues. Money developed to facilitate trade from bartering by serving as a medium of exchange, unit of account, store of value, and method of deferred payment. This allows specialisation and greater economic welfare.

1. Specialisation
& Division of
Labour
Lower 6th Micro
Nature of Economics
Mr O’Grady

2. Intro to
Specialisation
& DoL
Specialisation & Division of Labour
Mr O’Grady

3. Specialisation & Division of Labour
Specialisation: When economic agents are not self-sufficient but concentrate their
factors of production on a task to produce specific goods or services, and trade the
surplus with others.
Division Of Labour: The specialisation of labour. Production is broken down into many separate tasks
which are divided up among the workers
Specialisation happens at all levels of economic activity:
Specialisation within firms e.g. Teachers, teach. Cleaners, clean.
Specialisation between firms e.g. Ford, cars. Greggs, bakery.
Specialisation between regions of a country e.g. London, finance.
Specialisation between countries. Germany, machinery. Columbia, Coffee
Pin Factory: Adam Smith’s archetypal description of the division of labour and the
advantages and disadvantages of specialisation.
The pin making process can be split into 18 distinct steps, including the packaging the pins
Adam Smith visited a pin factory employing 10 men who produced 48,000 pins per day
If ten workers did every step themselves, he reckoned they could each produce 10 or 20 pins per day.
So the pin factory replaces up to 4,800 pin makers!
Labour productivity (output per person per day) in the factory is as high as 500 times that of
individual pin makers!

4. Pros & Cons
of The DoL
Specialisation & Division of Labour
Mr O’Grady

5. Pros of The DoL
Increased output per worker: people become
proficient through constant repetition of a
task
“learning by doing”.
Lower cost per unit: greater productivity
means increased input:output ratio
(productive efficiency)
Increases business profits
Lower prices for consumers: due to lower
costs causing gains in economic welfare
Consumers like paying less for things
Increased international Trade: Surplus output
can then be traded internationally
Countries specialize in areas of where they are
productive
This allows citizens to consume a greater quantity
and variety of goods and thus be better off
The theory of comparative advantage is key to this
Cons of The DoL
Falling productivity: Unrewarding work is
repetitive and requires little skill
lowers motivation and eventually lower productivity.
Quality issues: Workers may take less pride in
their work due to tedious nature
Absenteeism: Dissatisfied workers become less
punctual at work. Costly to firms
High worker turnover: Many people may choose
to move to less boring jobs
Increase cost of production due to cost of replacing
Little training: firms have limited incentive to train
workers
Workers may struggle to get new jobs. Unemployment.
Low Choice: Mass-produced standardized goods
lack variety for consumers
Over-reliance: Making only a small range of
products can lead to problems

6. Functions of
Money
Specialisation & Division of Labour
Mr O’Grady

7. Functions of Money
Specialisation Requires Trade: People can only specialise in the production of one
good or service if they can exchange/trade their good or service to fulfil their
needs and wants for the goods and services they do not produce.
If they can’t trade their output they won’t have a very good quality of life – most will die!
Bartering: trading goods and services through swapping one good for another.
But: This is costly as you must spend time searching for people willing to exchange with you.
E.g. A person with a kettle who wants a hammer must find someone with a hammer who
wants a kettle. A double coincidence of wants is required.
Why has money developed? To reduce the costs of exchange/trade from
bartering, and thus by encouraging trade it has allowed greater specialisation.
Money: Any item which fulfils the following four functions:
A Medium Of Exchange.
A Measure Of Value/Unit Of Account.
A Store Of Value.
A Method Of Deferred Payment.

8. A Medium of Exchange: Money can be used to buy goods and services
Eliminates the requirement of a double coincidence of wants.
People accept payment in money because they know that they will be able to use that money
to buy other goods and services.
A Measure of Value/Unit of Account: Money allows the value of something to be
expressed in an understandable way, and in a way that allows the value of items to
be compared.
E.g. If an apple cost £3 and a pen £1, everyone knows and agrees that a pen costs a third as
much an apple.
A Store of Value: This can refer to any asset whose “value” can be used now or
used in the future. This means that people can save now to fund spending at a
later date.
Assets that deteriorate would not make good money
A Method of Deferred Payment: Money is a unit of account across time,
expressing the value of a debt.
E.g. I owe you £10 in a years’ time. That is £10 is understandable now and in a years’ time.

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