MUZAHIR NAQVI

ISL (RR, PA), BDC, BLL, SICAS, ROOTS

SPECIALIZATION & DIVISION OF LABOUR:

Specialization refers to performing a specific task of the whole production

process by an individual worker, or producing one or few products rather than
a number of goods and services. Specialization can be studied at an individual,
firm or national level.

When the whole production process is split up into different operations and
each operation is carried out by a single worker, it is said that there is division
of labour. Specialization refers to focusing on particular skill, task or area of
expertise to become more proficient and efficient in that particular job.

ADVANTAGES

 Leads to greater skills among workers. By doing the same task day after
day and individual becomes efficient at performing that task. This is the
development of the idea ‘practice makes a man perfect’.
 Saves time. Individuals need to only train for one specific job and this
obviously saves time and effort in training people. Individuals can learn a
single skill very quickly.
 Economy use tools. If a person has been trained to do one specific job,
then they only need to possess the tools to do that particular job.
 Machinery can be used in the production process. Machinery can be quite
easily developed to perform a specific task in the production process. It
would be very difficult to devise a machinery to perform the whole
production process.
 Specialists can be employed. No individual is good in everything. Division
of labour allows people to specialize in doing a job in which they are both
proficient and efficient.
 Increased output.

1
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS

DISADVANTAGES

 Boredom and monotony. People can become bored of doing the same job
day after day. This may have a bad effect on the quality of the product.
 Interdependence. For the good to be produced, workers are dependent on
other workers to do their job efficiently. If this does not happen at every
stage of the production process then the production chain will break
down.
 Alienation. Workers sometimes feel alienated from fellow workers and the
management. They see themselves as being regarded as little more than
machines and have little contact with people making decision.
 A greater risk of unemployment. Workers specialize in performing a
particular task as part of the production of a particular good. However, if
demand for the good declines, some workers may find it difficult to train in
other jobs as they have only been trained to perform a particular job.
 Standardized product and lack of variety. Due to division of labour the
finished product will be indistinguishable from other products. The
consumers will be faced with a lack of variety as each product has passed
through the exact same process.

2
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS

PRICE MECHANISM

PPQ: Discuss whether free market economies or centrally planned

economies are more likely to make choices that will maximize the benefits
for consumers. [12]

It is a manner in which the prices of goods or services affect the demand and
supply of goods and services. It affects both buyers and suppliers to negotiate
prices. It describes the means by which millions of decisions taken by
consumers and businesses interact to determine the allocation of scarce
resources between competing was price mechanisms plays three important
Functions in a market.

1. Signalling function: The changes in price provides information to both

producers and consumers about changes in the market production.
Prices adjust to demonstrate where resources are required and where
they are not. Prices rise and fall to show scarcity and surpluses. If prices
are rising because of high demand, this is a signal to suppliers to expand
production to meet higher demand. On the other hand. If there is excess
supply, price mechanism will help eliminate the surplus by allowing the
market price to fall.

2. Transmission of preferences: Through their choices, consumers send

information to producers about changing nature of needs and want.
Higher prices act as an incentive to raise output as the supplier stands to
make a better profit. However, when demand is weaker during a
recession then supply contracts as producers cut back on output.

3. Rationing Function: When there is shortage of a product prices will rise

and deter same consumers from buying the product. Therefore, prices
serve to ration scarce resources when demand in a market outstrips
supply. When there is a shortage, the price will increase leaving only
those with the willingness and ability to pay, to purchase the product.
Hence the market price acts as a rationing device to equate demand
with supply.

3
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS

CLASSIFICATION OF GOODS

Private goods:

These are those goods bought and consumed by individual consumers, or firm

1. Private Goods

Private goods are goods and services supplied and sold through markets by
private sector businesses. A private good must be purchased to be consumed
and consumption by one individual prevents another individual from
consuming it. Their ownership is restricted to the group or individuals who
have purchased the good for their own consumption. Examples include dinner
at a restaurant, airplane rides, cellphones. Many tangible home goods qualify,
as they can only be used by those who have access to them. The majority of
the goods and services consumed in a market economy are private goods, and
their prices are determined by the market forces to some extent. They have
three important characteristics;

 Excludability: It is possible to exclude some people from using a private

good, this is normally done through charging a price. If the price is not
acceptable then goods will not be consumed.
 Rivalry: The consumption by one person reduces the availability for
others. In some ways it seems obvious that when we purchase food,
textbooks etc. then this means fewer of these goods are available for
purchase by others. In short rivalry is where consumption by one person
reduces availability for others.

4
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS

 Rejectability: Private goods can be unaccepted or rejected by the

consumers since they have multiple alternatives and the right to select the
product according to their preference.
 Traded in free market: Such goods can be freely bought and sold in the
market at a given price

2. Public Goods
Public goods are only provided by the government as these goods are
non-profitable due to being non-excludable and non-rival. It is difficult
to charge a price for public goods. There are two specific characteristics
of a public good, there are;
1. It must be non-excludable: this means that once the good has been
provided for consumers, no consumer can be stopped from
benefitting from the good.
2. It must also be non-rival as more and more people consume the
good, the benefit to those already consuming the product must not
be diminished. E.g. benefiting from a street light doesn’t reduce the
light available for others but eating an apple would.
3. Non-rejectability: This means if public goods are once provided, they
cannot be rejected. People will have to consume them whatso ever.

There are a number of goods that can be seen as public goods for example
lighthouse which is built to warn one ship at sea away from dangerous rocks, it
will automatically be provided to all the ships that sail within the certain
distance of the lighthouse.

3. Quasi Public goods:

Goods that have some but not all characteristics of public goods. Quasi public
goods can not be defined as pure public goods. They are light public goods
without truly being public goods. In practice, it is not possible, to classify all
products as being either public or private.

Example: sandy sea side beach

The problem that may be caused by the existence of public goods is a serious
one. The market may not produce them. There may be consumer demand for
such goods but the market may not be able to maximize profit from such
goods as there is a free rider problem. Some consumers attempt to gain a free
ride on the back of the consumers purchasing the product.

5
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS

4. Free Goods:
Free goods have zero opportunity cost since consumption is not limited
by scarcity. They have no prices as their name indicates and in theory no
factors of production are required to produce them. The air we breath
could be seen as a free good along with the water in the local river.

5. Merit goods: A merit good is a good, that has positive side effects
associated with it, thus inoculation against a contagious disease might
be seen as a merit good. This is because others who may not catch the
disease from the affected person also benefit. In short, merit goods are
those for whom the advantages are under estimated and that is why
these goods are under consumed, thus under produced leading to
market failure. Example of merit goods are healthcare and education.

6. Demerit goods: These are the goods that have adverse effects when
consumed. A demerit good is seen as any product that has adverse side
effects attached with it. Thus, junk food can be seen as a demerit good
because overconsumption of few nutrients can be viewed as a cause of
ill health. In short, demerit goods are goods which are harmful, but we
underestimate their harmful effects and tend to over consume it,
leading to market failure. In case of goods, consumes suffer from
information failure.

7. Normal/superior goods: These are the goods which are demanded

more as income of the consumer rises and vice versa e.g holiday, cars,
designer goods.

8. Inferior goods: They are demanded less as consumers income

increases. These are low quality products which are demanded more a
consumer income falls their demand falls as income rises.

9. Giffen goods: These are inferior goods which are demanded more as
their prices increase, Giffen goods are those inferior goods for which
there are expensive substitutes e.g potatoes. Giffen goods do not have a
normal negatively sloped demand curve. The demand curve for giffen
goods is positively sloped which shows that their demand has a positive
relationship with their price.

6
 MUZAHIR NAQVI
ISL (RR, PA), BDC, BLL, SICAS, ROOTS