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Tuesday, October 9, 2018

Specialization and Exchange

Specialization and Exchange

  • An economy is an area in which people produce goods and services

  • The private sector in an economy is made up of all the organizations and firms owned by members of the general public. It also consists of private individuals and voluntary organizations

  • The public sector in an economy is owned and controlled by a government. It consists of government organizations and the goods and services provided by the government

  • Production is any activity designed to satisfy people’s wants

  • The using up of goods and services to satisfy our wants is known as consumption

Factors of Production

  • The scarce resources available for use in the production of goods and services to satisfy our wants are called factors of production

  • These are the inputs into a production process from which an output of goods and services emerges

  • Land: natural resources

  • Labor: human resources (mental & physical efforts)

  • Enterprise: the business know-how and ability to run a production process; they employ and organize the resources in a firm and take risks

  • Capital: man-made resources

  • Factors of production can be used far more productively and produce far more services to satisfy wants if they specialize in the production of one or only a small number of tasks

Types of Goods

  • Consumer goods are any goods a consumer wants

  • Capital goods are resources which help produce other goods and services

  • Public goods are goods and services produce by the government

  • Merit goods are the goods that the governments produce for the benefit of the people


  • Specialization: a social phenomenon of human organizations each concentrating their efforts on a limited range of tasks to increase efficiency and productivity

  • The increased production achieved by specialization is the result of the division of labor where each worker specializes in doing a particular task rather than being a jack of all trades

  • Types of specialization:
    By industry: e.g. cotton industry
    By firms: e.g. spinning
    By workers: termed as division of labor e.g. head of production
    By region: e.g. sports goods in Sialkot
    By international: e.g. oil in Middle East

  • Limitations to the division of labor:
    Size of market: if the demand is low, the excess supply will just be a cost for the company
    Transport cost: good transportation is always beneficial for a firm
    Nature of product: some goods and services cannot be broken down into smaller tasks

  • Advantages of division of labor:
    More goods and services can be produced because of the speed and skill
    Full use of everyone’s capabilities
    Time is saved
    Allows machinery to be used
    More wealth is created therefore improving the people’s standard of living

  • Disadvantages of division of labor:
    Work may become boring
    Alienation because not everyone sees the end product
    Dependency increases
    All products become standardized and cannot please everyone

  • Diversification is the process of entering new business markets with new products and expanding your production

  • A firm must have diversification to avoid loss of production due to any reason

Money and Exchange

  • Money is a mode of exchange

  • Problems associated with barter:
    Rates of exchange undefined
    Double coincidence of wants needed
    Lack of space & durability issue
    Cannot save

  • Functions of money:
    Medium of exchange: generally acceptable everywhere
    Measure of value: price of goods can be fixed according to a single commodity
    Store of value: tends to hold its value overtime
    Deferred method of payment: ability to buy goods on credit

  • Characteristics of good money:
    Valuable (store of value)

  • Why is money important?
    Hard to trade in barter
    Encourages specialization
    Raises national income
    Higher standard of living

  • Near money are the assets that can quickly be converted into cash

  • The number of times notes and coins are circulated in the economy within a year is called the velocity of circulation

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