How Does Specialization Help Companies Achieve Economies of Scale?

Specialization and economies of scale are two related economic concepts. Specialization involves focusing on a particular area of expertise to increase efficiency and productivity, which helps businesses achieve economies of scale. This relationship was explored by Adam Smith, who is considered to be the father of modern economics. Let’s take a look at these concepts and how they fit into Smith’s theory.

Adam Smith’s Theory

Adam Smith laid out many economic theories, one of which was that the division of labor through specialization leads to growth. This idea was part of his book, “An Inquiry into the Nature and Causes of the Wealth of Nations.”

Smith believed that a company can hire more workers as it grows and divide them into certain roles. This means they end up with fewer responsibilities so they can improve and specialize in one core skill. Once a worker becomes more efficient, they become more productive and take up less time and fewer costs.

Defining Economies of Scale and Specialization

Economies of scale describes the cost advantage a company achieves with efficient production. Increasing production and lowering costs result in economies of scale because the costs are spread out over a larger number of goods. Producing additional goods doesn’t require a significant increase in costs. Reducing the cost of units per production is the main benefit of economies of scale.

In an economic context, specialization means focusing on one task rather than multiple tasks. It is a basic concept of learning. This allows workers to perfect that one task. When a person attempts a specific task for the first time, they may not be proficient at it. The more time they spend practicing or learning a skill, the better an individual gets at it. They also become efficient once they’ve mastered that task.

Achieving Economies of Scale Through Specialization

As labor is divided amongst workers, workers can focus on a few or even one task. The more they focus on one task, the more efficient they become, which means that less time and less money is involved in producing a good. This means that the same time and money allow for the production of more goods.

When specialization occurs and results in economies of scale, a company can reduce the prices of its goods or services because it costs less to produce them. This provides a competitive advantage in the marketplace.

Example of Specialized Labor and Economies of Scale

An assembly line for a manufacturing company provides a useful example of specialization leading to economies of scale. Suppose a bicycle manufacturer has 10 workers each assembling 10 bicycles simultaneously. The time for one individual to assemble a bike could be considerable. In addition, the know-how of having to put multiple pieces together requires the need for more skills.

If the bicycle maker switches to an assembly line in its factory, the 10 workers can each focus on a specialized aspect of the assembly process. For example, one worker would add the brakes, the next worker would add the pedals, and so forth. Each worker would become proficient in their specific task and allow the bike to be assembled faster as it moves down the assembly line. This increases efficiency and allows for additional bicycles to be produced.

Because production increases, the fixed costs of production such as the building and tools used to assemble the bicycles are spread over an increasing number of products, thus achieving economies of scale.

The Bottom Line

Economic theory and the actual implementation of those theories have proven that as a company’s workforce specializes in specific skills, it leads to efficiency, which leads to more goods produced. As more goods are produced, the cost of producing them is spread out, leading to economies of scale, which is an important competitive advantage for any company.