If you still do not believe that scarcity is a problem, consider the following: Does everyone need food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless, and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment.
How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for a wage. Or if you do not, someone else does on your behalf. Yet most of us never have enough to buy all the things we want. This is because of scarcity. So how do we solve the problem of scarcity? Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a vacation.
Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defence or to protecting the environment. So why do we not each just produce all of the things we consume?
The simple answer is most of us do not know how, but that is not the main reason. Economic actors that specialize in a task become more proficient at it. It's the same reason why professional athletes practice before a game or why children write their letters over and over again in preschool; repetition and muscle memory increase productivity.
Rather than having every actor practice at producing all different kinds of goods or services, human beings naturally tend to specialize in narrow fields and then trade with one another. This creates a division of labor. Even if someone were naturally better at producing every kind of good or service than everyone else — what economists call an " absolute advantage " in trade — it still makes sense to specialize in just one area and trade with those who are less productive.
To illustrate why this is the case, consider the following example. An attorney has a secretary in her law office. Suppose she can type faster, file faster, and use a computer faster than her secretary.
When it comes to doing secretarial work, her labor productivity is higher than that of her secretary. However, that isn't her most valuable work; her most valuable work is practicing law.
Every hour that she spent doing secretarial work is an hour that she couldn't spend being a lawyer, so she trades with her secretary to maximize her earnings as an attorney.
The aggregate impacts of specialization on the economy are massive. Occasionally, people who specialize in a field develop new techniques or new technologies that lead to huge increases in productivity. Increased specialization ultimately leads to higher standards of living for all those involved in economic exchanges.
Adam Smith Institute. Business Essentials. Your Privacy Rights. Smith offered three reasons. First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage.
People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota.
If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.
Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery.
In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better. A similar pattern often operates within businesses. International trade is known to reduce real wages in certain sectors, leading to a loss of wage income for a segment of the population.
However, cheaper imports can also reduce domestic consumer prices, and the magnitude of this impact may be larger than any potential effect occurring through wages. International trade opens new markets and exposes countries to goods and services unavailable in their domestic economies. Trade agreements may boost exports and economic growth, but the competition they bring is often damaging to small, domestic industries.
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