couruthim
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Why is division of labour/specialisation limited by transport costs and by a small market? Thanks
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rhysjohnwilliams
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The division of labour is the breaking up of a production process into jobs so that workers can specialise, and overall see an increase in productivity. If division of labour occurs then we would expect output to increase quite dramatically; if the market is small then there will be no-one to sell this additional output to (in fact prices would fall and so profit would fall - not desirable for the company) so there would be no point in the firm specialising.
For example if we think about extremely high end cars then the company wants to produce only a few of these to keep their prices high (conspicious consumption effect), if they decided to have a lot of division of labour then they would end up producing a LOT of cars but would have nobody to sell it to at the price they want to sell it at. Furthermore these companies advertise the good they sell as being hand-made and customised: customisation isn't something which can really occur with division of labour because DoL is more about producing as many of a specific good as possible.

Transport costs: I think what the examiner is trying to get at is that if we are producing a good which has 3 components and I try and produce them all at 1 site then I am not really benefiting from DoL. If instead I mass-produce these 3 components at different sites with specialised workers then I can produce a lot of them, and hopefully more cheaply. But ultimately I am going to need to bring these 3 components to one site so that I can assemble my final good. If it costs me more to transport the 3 components to the assembly building than it did to specialise then I would have been better off just producing the components in one building.
Does this make sense? It's not so easy to write down!

Rhys
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