Concept 7: Specialization

Beginner

Specialization is the practice of an individual or business focusing their productive capacity (skills, resources, etc.) on a limited set of goods and services. Specialization is important because it greatly improves productivity – the ratio of inputs to outputs. The typical example is the assembly line. Producing goods on an assembly line increases productivity because multiple tasks can happen simultaneously and just when they are needed.

Specialization is related to the concept of division of labor – where workers with different skills and tools contribute different parts to a final product. Specialization can be seen in nearly every modern industry. Fast food chains, law firms, education, video-game development and programming, medicine and manufacturing all use specialization in one form or another. Specialization can also refer to a business like a hardware store or barbershop. Both businesses can operate more effectively because they offer a narrow set of goods and services, and they develop expertise in these areas. Specialization leads to and is made possible by Concept 8 - Voluntary Exchange.

Intermediate

Specialization can happen in layers. Let’s use teachers as an example. Most colleges require future teachers to declare some sort of “education” major. At the next layer, many states certify at specific grade levels, so the teacher must decide if they want to teach elementary, middle, or high school. Next, there are subject layers like social studies, math or science. There are further specialties as well including special education, gifted and Advanced Placement. An AP Economics teacher and a kindergarten teacher develop very different skill sets, which makes them both better at their jobs.

In private businesses, these specialties often yield to better paying jobs. Anesthesiologists, for example, get paid better than general practitioners in the medical field. Some states require general plumbers to get special training and a special license to install sprinkler systems. These plumbers typically charge higher fees for their specialized services. In this way, specialization is an example of why people should invest in their own human capital.

Advanced

Nations can also develop specializations over time. These specializations are largely driven by natural resources or past investments in human or physical capital. It is difficult to grow and harvest bananas in the United States, for example, but quite easy in Ecuador – the world’s largest banana exporter. This specialization leads to a broader concept in international trade called comparative advantage (Concept 36 - Comparative Advantage). When nations (and businesses) specialize in producing goods and services for which they have lower opportunity costs, more goods and services are produced globally. If free trade exists, these goods and services will be re-distributed according to global demand, and global efficiency and satisfaction can increase. When trade barriers are erected, however, nations must produce some goods and services they do not specialize in, and overall efficiency decreases.