CH5 Specialisation and the division of labour

Question 1

What does specialisation and division of labour give rise to?

Answer 1

gives rise to large gains in productivity

Question 2

What are the 3 sectors the economy can be divided into? what else can it also be divided into?

Answer 2

-primary sector, secondary sector and tertiary sector
-it can also be divided between the state sector and private sector

Question 3

why do markets exist?

Answer 3

for buyers and sellers to exchange goods and services using barter or money

Question 4

What are the four functions money has?

Answer 4

-medium of exchange
-a unit of account
-a store value
-a standard for deferred payment

Question 5

what is specialisation?

Answer 5

it is the production of a limited range of goods by an individual or firm or country in co-operation with others so that together a complete range of goods is produced

Question 6

Can specialisation occur between nations? Give an example and what is intensifying this process of specialisation?

Answer 6

yes
-for example, a country like Honduras produces bananas and trades those for cars produced in the United States.
-globalisation is intensifying this process of specialisation between nations.

Question 7

can specialisation occur within economies?

Answer 7

yes
-for example, in the UK, Cornwall specialises in tourism whilst London specialises in financial services

Question 8

What is specialisation by individuals called?

Answer 8

specialisation by individuals is called the division of labour

Question 9

what is productivity ?

Answer 9

output per unit of input

Question 10

what is labour productivity?

Answer 10

output per worker

Question 11

what is capital productivity?

Answer 11

output per unit of capital employed

Question 12

What are the advantages of division of labour (4)

Answer 12

1) it enables workers to gain skills in a narrow range of tasks. These skills enable individual workers to be far more productive than if they were jacks-of-all-trades. In a modern economy a person could not possibly hope to be able to take on every job which society requires
2) the division of labour makes it cost-effective to provide workers with specialist tools. For instance, it would not be profitable to provide every farm worker with a tractor. But it is possible to provide a group of workers with a tractor which then can then share
3) time is saved because a worker is not constantly changing tasks, moving around from place to place and using different machinery and tools
4) workers can specialise in those tasks to which they are best suited.

Question 13

What are the disadvantages of division of labour?

Answer 13

-if jobs are divided up too much the work can become tedious and monotonous. Workers feel alienated from their work. This will result in poorer quality of work and less output per person.
-the workers will do anything to avoid work - going to the toilet, lingering over breaks and reporting sick for instance.

Question 14

What are the disadvantages of over-specialisation?

Answer 14

-if the industry fails it leads to increase in unemployment. E.g. the north of England, Wales, Scotland and Northern Island have suffered high unemployment since the 1950s as their traditional heavy industry, such as coal mining and shipbuilding, declined and was not replaced by enough new service sector jobs.
-Another problem is that a breakdown in part of the chain of production can cause chaos within the system and result in the whole system having to stop. This will then result in less output and potentially less profits too.

Question 15

What are the three main sectors which economies are structured into?

Answer 15

-primary sector: this is where raw materials are extracted and food is grown. E.g. fishing, oil extraction
-secondary sector: also known as manufacturing sector, this is where raw materials are transformed into goods. E.g. food processing, furniture making
-tertiary sector: also known as the service sector, this is the sector that produces services such as transport, sport and leisure, financial services etc

Question 16

what do most firms do in regards to the sectors?

Answer 16

-most firms tend to operate in just one of these sectors.
-some very large firms, such as BP, operate across all three sectors, from the extraction of oil to its refining and sale to the public through petrol stations

Question 17

What are the two other sectors economies can also be split into?

Answer 17

-the public sector: this is the state or government sector of the economy
-the private sector: the part of the economy owned by private individuals, companies and charities

Question 18

What are markets?

Answer 18

markets are where buyers and sellers meet

Question 19

what are the different places buying and selling can take place?

Answer 19

-online, in newspapers and magazines, through mail order or over the telephone.

Question 20

what is a market?

Answer 20

-a market is any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.

Question 21

What is a sub-market?

Answer 21

-this is a term used to describe a market within a larger market. E.g. the market for diesel fuel in the UK is a sub-market of the market for all oil-based fuels in the UK. Equally, the market for all oil-based fuels in the UK is a sub-market of the international market for fuels

Question 22

what do many Western economists argue about specialisation, exchange, and the market?

Answer 22

many western economists argue that specialisation, exchange and the market lie at the heart of todays economic prosperity in the industrial world.
-However, whilst it is likely that the market system is a powerful engine of prosperity, we shall see that it does not always lead to the most effective allocation of resources.

Question 23

what has specialisation enabled people to enjoy? however, what does specialisation necessitate?

Answer 23

-it has enabled people to enjoy a standard of living which would be impossible to achieve through self-sufficiency.
-Specialisation, however, necessitates exchange. Workers can only specialise in refuse collecting, for instance, if they knew that they will be able to exchange their services for other goods and services such as food, housing and transport

Question 24

what has exchange for most of history meant?

Answer 24

-it has meant barter - swapping one good for another.
-however, barter has many disadvantages and it would be impossible to run a modern sophisticated economy using barter as a means or medium of exchange
-it was the development of money that enabled trade and specialisation to transform economies into what we know today

Question 25

what is money?

Answer 25

anything which is widely accepted as payment for goods received, services performed, or repayment of past debt.

Question 26

What are the four functions of money (4 things which something must fulfil if it is to be money)

Answer 26

1) a medium of exchange
2) a measure of value
3) a store of value
4) a method of deferred payment

Question 27

explain why ‘a medium of exchange’ is one of the functions of money

Answer 27

-money is used to buy and sell goods and services. A worker accepts payment in money because they know they will be able to use it to buy other things
-there is not money in a barter economy. Exchange is conducted directly by swapping one good with another. This requires a double coincidence of wants. Barter requires that each party of the transaction wants what the other has to trade. This is costly and difficult, if not impossible, and therefore trade is discouraged.
-without trade there can be no specialisation. Without specialisation, there can be little or no increase in living standard.
-so barter is associated with types of economy where individuals or small groups are self-reliant, and the need for trade is small.
-money separates the two sides of a barter transaction.

Question 28

what is the most important function of money?

Answer 28

a medium of exchange

Question 29

explain why ‘a measure of value’ is one of the functions of money

Answer 29

-money acts as a unit of account. If a dress costs £30 and a skirt costs £15, we know that the value of one dress equals the value of two skirts.
-at times of very high inflation, such as in Germany in 1923, money ceases to act as a unit of account. Prices may change by the hour. High inflation therefore destroys the ability of money to perform this function.
-it is very difficult under a barter system to establish an agreed unit of account as people’s opinions of the value of certain items differ greatly.

Question 30

explain why ‘a store of value’ is one of the functions of money

Answer 30

-a worker who receives wages is unlikely to spend the money immediately. She may defer spending because it is more convenient to spend the money later. She will do this only if what she can buy in the future is approximately equal to what she can buy today. So money links the present and the future. It acts as a store of value.
-high inflation destroys this link because money in the future is worth far less than money today.
-in Germany when there was hyperinflation in 1923, people started to refuse payment in German money because it would lose so much value by the time they had spent it

Question 31

explain why ‘a method of deferred payment’ is a function of money

Answer 31

-if people lend money today, they will only do so if they think that they will be able to buy roughly the same amount of goods when it is paid back. In trade, a company which accepts an order at a fixed price today for delivery and payment in a year’s time will only do so if it is confident that the money it receives will have a value which can be assessed today.
-so again money must link the different time periods when it comes to borrowed as well as saved money
-when money ceases to have this function, credit and borrowing collapse and this is very damaging to investment and economic growth in an economy.

Question 32

what are the 5 different forms of money in a modern economy?

Answer 32

• cash
• money in current accounts
• near monies
• non-money financial assets
• money substitutes

Question 33

Explain the form of money: cash
- what is cash? does it have intrinsic value? how is it issued? how do govs reinforce the acceptability of cash?

Answer 33

-cash means notes and coins. Cash is token money.
-it has little or no intrinsic value (unlike gold)
-it is issued by either the government or with the permission of government
-govs reinforce the acceptability of cash by making it legal tender. This means that it must be accepted by law as a means of payment

Question 34

is cash perfect money?

Answer 34

no.
-in the UK it is an almost perfect medium of exchange. But inflation affects three of the functions of money - those of a measure of value, a store value and a method of deferred payment.
-in 1975 for instance, UK inflation was nearly 25 percent. Anyone holding £1 at the beginning of the year could only buy 75 pence worth of goods with it at the end of the year. The higher the rate of inflation, the less it can be said that cash is a ‘good’ money

Question 35

explain the form of money: money in current accounts

Answer 35

-banks and building societies in the UK offer customers current account facilities.
-current accounts have two distinguishing features. First, cash can be withdrawn on demand from the account if it is in credit. So deposits can be immediatley converted into money if the account holder so wishes. Second, account holders are provided with a cheque books and debit card.
-Cheques and debit cards can be used to purchase goods and services. Cheque book money is therefore a medium of exchange. It is not perfect because people and firms can refuse to accept cheques and debit cards in a transaction.
-Moreover, little or no interest is offered on accounts and so current account deposits lose value over time with inflation, damaging their store of value function. But deposits in current accounts are nearly as good a form of money as cash

Question 36

explain the form of money: near monies
-what are near monies?
-what is the most type of near monies in the UK?

Answer 36

-near monies are assets which fulfil some but not all of the functions of money.
-in particular, they act as a measure of value and stores of value but cannot be used as mediums of exchange.
-however, they are convertible into a medium of exchange quickly and as little cost. (the ease with which an asset can be converted into money without loss of value is termed liquidity. The more liquid an asset, the more easily it is convertible into money)
-in the UK, the most obvious type of near monies is time deposits with banks and building societies. They pay higher rates of interest than current accounts. They are therefore used more for saving and less for making transactions than current accounts. Depositors need to give notice if they wish to withdraw from the account (hence the term ‘time’ deposits). Alternatively, many accounts offer instant access if an interest rate penalty is paid (i.e. the saver loses money for the privilege of instant withdrawal)

Question 37

explain the form of money: non-money financial assets

Answer 37

-all financial assets can be converted into money.
-however, for most assets the potential penalties for doing this are great. There can be a long waiting time for withdrawal and there can be considerable loss of money from conversion. This impairs their functions as measures of value and stores of value.
-economists do not classify these assets as money.
-shares, for instance, are easily sold, but it can take up to a month to receive the money from the sale. Shares can also change value rapidly and are therefore not a good store of value or a method of deferred payment

Question 38

explain the form of money: money substitutes

Answer 38

-money is not the only means of payment for goods and services.
-charge cards and credit cards have become increasingly important over the past 40 years as a medium of exchange. But they are not stores of value. This is because possession of a card does not show that the cardholder has money in the card account. The card only represents an ability to borrow money instantly. So credit cards, for example, are not money but they are money substitutes (i.e. they are used instead of money)