Lesson: What Is Economics and Why It Is Important 

Why the Division of Labor Increases Production: Specialization (continued)

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  • The third way that division of labor increases is through "economies of scale".
  • Economies of scale gives businesses an advantage. Increasing production means lowered costs. This is because costs are spread over more goods.
  • The size of a business determines if it can have an economy of scale. Larger companies have more cost savings.
  • Economies of scale can be internal or external. Internal economies of scale occur within a single company. External economies of scale impact the whole industry.
  • Division and specialization of labor help with the problem of scarcity.

3. Specialization allows businesses to take advantage of "economies of scale," which happens in every industry. 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. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines, and hire workers who perform specialized tasks, which results in a lower average cost of production per car.

The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society, as a whole, can produce and consume far more than if each person tried to produce all of his/her own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

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