Loading the player...

What is 'Specialization'

Specialization is a method of production where a business, area or economy focuses on the production of a limited scope of products or services to gain greater degrees of productive efficiency within an overall system. Many countries, for example, specialize in producing the goods and services that are native to their part of the world, and they trade for other goods and services. This specialization is therefore the basis of global trade, as few countries have enough production capacity to be completely self-sustaining.

BREAKING DOWN 'Specialization'

Specialization essentially an agreement within a community, an organization or a larger group where each of the members best suited for a specific activity assume responsibility for its successful execution. Specialization can occur on both the microeconomic level and the macroeconomic level.

Microeconomic Specialization

At the individual level, specialization usually comes in the form of career or labor specialization. Each individual member of an organization or economy, for example, has a unique set of talents, abilities, skills and interests that makes her uniquely able to perform a set of tasks. Labor specialization exploits these unique talents and places people in areas where they perform the best, helping both the individual as well as the overall economy.

If, for example, a single individual excels at math but is not a proficient writer, it benefits both the individual and the community if she pursues a field that relies heavily on mathematics.

Using another example, specialization can even refer to the production capacity of an individual firm. When setting up a factory, an assembly line is organized to increase efficiency rather than producing the entire product at one production station.

Macroeconomic Specialization

Economies that realize specialization have a comparative advantage in the production of a good or service. A comparative advantage refers to the ability to produce a good or service at a lower marginal cost and opportunity cost than another good or service.

When an economy can specialize in production, it benefits from international trade. If, for example, a country can produce bananas at a lower cost than oranges, it can choose to specialize and dedicate all of its resources to the production of bananas, using some of them to trade for oranges.

Specialization also occurs within a country's borders, as is the case with the United States. For example, citrus goods grow better in the warmer climate of the South and West, many grain products come from the farms of the Midwest, and maple syrup comes from the maple trees of New England. All of these areas focus on the production of these specific goods, and they trade or purchase other goods.

RELATED TERMS
  1. Special Situation

    A special situation is a circumstance involving a security that ...
  2. Economies of Scope

    Economies of scope are economic factors that make it cheaper ...
  3. Economics

    Economics is a social science concerned with the production, ...
  4. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  5. Excess Capacity

    Excess capacity occurs when a firm's actual production is less ...
  6. Microeconomics

    Microeconomics is the branch of economics that analyzes market ...
Related Articles
  1. Insights

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  2. Insights

    Explaining Comparative Advantage

    Comparative advantage is the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. Having a comparative advantage doesn't ...
  3. Investing

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  4. Managing Wealth

    Microeconomics vs. Macroeconomics: Which Is More Useful for Investment?

    Find out why investors are better off ignoring macroeconomic forecasts, and should instead focus on the lessons that microeconomics can teach them.
  5. Insights

    Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  6. Insights

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  7. Personal Finance

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. To illustrate, we use the example of renting a New York City apartment.
  8. Financial Advisor

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  9. Small Business

    How Special Purpose Entities Help Fight Risk

    A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
RELATED FAQS
  1. What are the economic impacts of specialization?

    Read about the economic impacts of specialization and the division of labor, and see why individuals, firms and even countries ... Read Answer >>
  2. How do I differentiate between micro and macro economics?

    Differentiating between microeconomics and macroeconomics is primarily concerned with the difference of the scales of the ... Read Answer >>
  3. What is comparative advantage?

    Comparative advantage is an economic law that is foundation for free-trade arguments. Read Answer >>
  4. Do production costs include the marginal cost of production?

    Learn more about marginal costs of production and production costs. Find out how businesses can use marginal cost calculations ... Read Answer >>
  5. Is industrialization good for the economy?

    Find out why industrialization can be considered the most important economic transition in history, dramatically increasing ... Read Answer >>
  6. How can you calculate diminishing marginal returns in Excel?

    Learn more about production costs and applying the law of diminishing marginal returns using Excel. Find out more about how ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center