Updated: Feb 21
Producing one or very few products to maximize productivity with limited resources
Why do firms specialize? So that they can reduce cost as much as possible, while producing the most they can.
Firm A produces shoes and they are labour-intensive. They produce sports shoes as well as casual wear shoes at the same cost. Firm A makes better casual wear shoes than sports wear according to a customer survey. So, Firm A decides to specialize in producing casual wear shoes only.
This is because at the same cost, Firm A can produce more and better quality casual wear shoes than sports wear. As such, they can sell more shoes and earn more revenue and profit.
Firm A continues to produce casual wear shoes, but realized that in order to increase output, they would have to purchase a machine that would produce most of the shoes. Firm A is no longer labour-intensive, but is capital-intensive.
Firm A later discovered that they could lower average cost further if the machine and workers focused on producing a specific shoe model. Firm A have divided specific task to specific workers or group of workers - this is known as division of labour.
Therefore, a firm specializes when task are divided between workers so that they can concentrate on a specific tasks and become more skilled at or a firm only produces certain products that they produce best.
What other benefits does Firm A get from producing casual wear shoes only? Comment below
How do you achieve economies of scale with specialization?
Does opportunity cost happen when a firm specialize?
Economies of Scale
Division of Labour