Question

Understand Adam Smith’s “extent of the market …” quote. What does that have to do with scale, scope, and learning economies? some eg?

Answer 1

Adam Smith in his quote mentioned that division of labor depends on the size of the market. The greater the market more will be the division of labor and vice versa. The simple reason behind is that when the market is small or does not sell too many goods then the manufacturing process and thus less number of people will be employed for work and to produce such good or to provide such service. On the other hand when the market size is big or relatively larger then the manufacturing process is quite large as more number of goods will be produced. This will eventually lead to division of labor as more number of people will be required to produce to the good. The division of labor will be sub dividedand it might be firther divided to perform the tasks. Thus we can clearly see that division of labor can be affected directly or indirectly by the scale and scope of market.

The learning curve of a business entity or firm is the curve which depicts the knowledge level of the firm and as the firm keeps on producing it’s goods then the knowledge curve also increases. Thus for a dirm which a much larger learning cutve the division of labor will be more and complex as more skills would be required to perform the work and when learning curve is not high then less number of people are required as the work to be performed is not much and thus it will lead to less division of labor. An example could be of the company named Mc Donalds. When it initially started business it was producing on a very low scale and that too only domestically thus less number of workers were required but soon when it became an MNC then division of labor was high as the manufacturing process needed to be improved and expansion was necessary. Thus it proves that division of labor increases with the scale of business.