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Definition of Specialization:

Specialization occurs when a producer or individual concentrates on the production of a good or service. To maximize economic efficiency and profits a company should specialize where it has a comparative advantage. 

Detailed Explanation:

Normally some form of specialization occurs when people, companies, or even countries interact. After all, we live in a competitive world and we strive to be part of the most successful team, or business possible. To maximize wealth and economic efficiency, people, businesses, and countries should specialize where they have a comparative advantage. A person, company, or country has a comparative advantage when they can produce a particular good or service at a lower opportunity cost than another producer. Countries benefit when they specialize in manufacturing goods they have a comparative advantage in and rely on trade to receive the rest. Many factors may contribute to a country's comparative advantage. The proximity of resources, the labor talent, and the technological know-how are just a few. 

In building a team, a coach should have his players play where they can contribute the most to the team - even though a player may be better in another position. For example, Steve may be best suited at quarterback, but his team has another quarterback who is just as talented. Fortunately, Steve can also play wide receiver and Steve is more talented than many of the other wide receivers on his team. His coach chooses to play Steve at wide receiver because that is where he can contribute the most to his team. Steve improves the overall potential of his team by specializing in the area (wide receiver) where he has a comparative advantage.

A law firm needs people to prepare tax returns, run errands, prepare legal documents, meet with clients, clean the office, and do many other jobs. The owner is able to do all of these chores but her time is more productive (generates more income) if she meets with clients rather than running errands and preparing tax returns. Her firm would be more profitable if she specializes in meeting with clients and hires employees or subcontracts with other companies to complete the other jobs. Another example is a business that hires another company to manufacture its product in a country with lower labor costs. The labor savings enable the manufacturing company to manufacture, ship the product, and earn a profit. The hiring company benefits from reducing its production cost and being able to offer its good or service at a lower price while increasing its profits. Each company is specializing where it has a comparative advantage. The manufacturing company specializes in manufacturing because of its comparative advantage resulting from having lower labor costs. The hiring company may have a comparative advantage in marketing and distributing the product so it specializes in those jobs. Ultimately, specializing where the companies have a comparative advantage benefit both businesses.

Today, specialization is prominent. When we tear a ligament, we seek an orthopedic surgeon, not a general practitioner. A professional orchestra seeks a musician specializing in the violin rather than a talented musician who plays several instruments fairly well. You would not hire someone who fixes your car to fix your computer. In each case, we seek the services of specialists.

Dig Deeper With These Free Lessons:

Comparative Advantage and Specialization
Opportunity Cost – The Cost of Every Decision
Supply and Demand – The Costs and Benefits of Restricting Supply
Production Possibilities Frontier

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