The division of labour.

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Economic system is “a system for coordinating the actions of all the people in a society in order to decide what to produce, how to produce and for whom to produce” (Waldron, 2003, P1). Thus, to analyse the effectiveness of economic system is actually to study the its resources efficiency, which includes allocative efficiency, decision about what to produce; and productive efficiency, decision about how to produce; as well as its equity, for whom is to produce.

Before explaining how “division of labour” and “comparative advantages” works on economy efficiency, it’s necessary to have a look into how it affected to Neo and Angie’s dinner last weekend.

On last Saturday’s together-dinner, Angie and Neo were two selected cooks to make fried beefsteak and vegetable salads. Neo was good at cooking that can fry approximate 8 pieces of beefsteak or made 16 dishes of salads in an hour while Angie can only offer 4 dishes of fried beefsteak or 10 dishes of salads in one hour’s time. (See the form below)

As it is shown in the table, Neo had absolute advantage in both frying beefsteak and making salads. However, Angie should be considered to have comparative advantage in making salads since her opportunity cost of making one dish of salads was frying 1/3 piece of beefsteak. Compared with Neo’s opportunity cost which was 1/2 pieces of beefsteak, Angie forgone less to make salads.

Therefore we let Neo concentrate on frying beefsteak and keep Angie making salads, that is to specialise them with their own comparative advantages. By doing this, the total output is higher than other outputs from different methods of specialisation no matter how the demand is. (See “Neo & Angie’s Production Line (specialised with comparative advantage), Graph 1).

From the two extreme assumed line which shows the specialisation fully with comparative advantage and comparative disadvantage respectively, we see that “specialisation does not necessarily increase total outputs. Some patterns of specialisation increase outputs, while others decrease them.” (Carven, 1990, P18) . From the graph it clearly shows that the only pattern to increase productive efficiency and bring out both more fried beefsteak and salads is the one follows comparative advantages.

What’s more, if Neo and Angie are two individual producers with self-interest and want to have both two kinds of products. The best way to carry on the process is to be concentrating on the works they are good at then trade with each other. Since trading will not change the total output, they will both have the increased production and their needs satisfied. In addition, they will know what others want, and how much more they should produce through the process of trading. Therefore this small business achieves the allocative efficiency.

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Similarly, the resource efficiency of an economic system also depends on the method of division of labour. It’s a good way to show how this rule works by comparing the efficiency of two extreme type of economic system, which are central-planed economic system and free-market system.

The first thing that should be considered is the allocative efficiency of an economic system. A economic system with allocative efficiency is a system that can “produce the goods and services that people actually want, in the correct quantities”. (Economic System lecture hand out, 2003, P1)

In central-command economic system, ...

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