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Specialization in Economics: Definition & Concept

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  • 0:00 Definition of Specialization
  • 0:15 Division of Labor
  • 1:40 Opportunity Cost
  • 5:10 Lesson Summary
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Lesson Transcript
Instructor: Kallie Wells
How does one increase productivity? Why do nations focus producing certain goods over others and then trade? These questions are addressed in the discussion of specialization in economics.

Definition of Specialization

Specialization is when a nation or individual concentrates its productive efforts on producing a limited variety of goods. It oftentimes has to forgo producing other goods and relies on obtaining those other goods through trade.

Division of Labor

Adam Smith was one of the first economists to explain the benefits one gets from specialization. He focused on describing the benefits of individuals specializing in labor. In An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he describes the benefits of one type of specialization, division of labor, which is when cooperating individuals perform specialized tasks. Smith discusses this type of specialization in context of a pin factory.

Smith explains that if the pin factory had each person making pins from start to finish, they may be able to make upward of 20 pins each a day. Now, consider if the pin-making process was divided into distinct operations, and each person were able to specialize in a particular operation in the pin-making process. He posits that an entire factory of 10 workers could produce 48,000 pins a day. With a factory of 10 workers, that would equate to 4,800 pins per person per day compared to the initial 20 pins per day without division of labor.

Here is an example of specialization - the assembly line. Each person specializes in one distinct operational function, thus improving the efficiency of production overall. We see this type of production frequently at cafes, restaurants, etc.

Division of labor - the assembly line

Opportunity Cost

David Ricardo addresses specialization on a global, macroeconomics level to explain why countries specialize and enter into trade. Ricardo's justification is based on the concept of opportunity cost. Opportunity cost is the cost of the next best alternative, or what you are giving up to do what you are currently doing. Ricardo explains why opportunity cost is an incentive for rational people and nations to specialize and enter into trade. This concept can be illustrated with a simple example.

Consider the situation where you and I are stranded in the wilderness. I can either pick 100 berries or catch 5 fish. You can either pick 50 berries or catch 10 fish. For me to catch 5 fish, it will cost me 100 berries. Therefore, the opportunity cost of each fish is 20 berries. For me to pick 100 berries, I have to forgo 5 fish. The opportunity cost of each berry is 1/20 fish.

Following the same logic, your opportunity cost of each fish is 5 berries and of each berry is 1/5 fish. I have a lower opportunity cost for berries, 1/20 fish compared to your 1/5 fish, therefore I have a comparative advantage in picking berries.

Someone is said to have a comparative advantage in producing a good when he or she has the lowest opportunity cost to produce that good. You have a comparative advantage in catching fish. This is not to be confused with absolute advantage. Absolute advantage means you can produce a good with fewer resources than another person or nation. When you specialize in what you have a comparative advantage in producing, you will be maximizing net benefits by minimizing opportunity cost.

If we were to initially be self-sufficient and both split our time between catching fish and picking berries, we would get these results:

Production without specialization

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