U.S. Economy

Before goods and services can be distributed to households and consumed,

they must be produced by someone, or by some business or organization. In

the United States and other market economies, privately owned firms

produce most goods and services using a variety of techniques. One of the

most important is specialization, in which different firms make different

kinds of products and individual workers perform specific jobs within a

company.

Successful firms earn profits for their owners, who accept the risk of

losing money if the products the firms try to sell are not purchased by

consumers at prices high enough to cover the costs of production. In the

modern economy, most firms and workers have found that to be competitive

with other firms and workers they must become very good at producing

certain kinds of goods and services.

Most businesses in the United States also operate under one of three

different legal forms: corporations, partnerships, or sole

proprietorships. Each of these forms has certain advantages and

disadvantages. Because of that, these three types of business

organizations often operate in different kinds of markets. For example,

most firms with large amounts of money invested in factories and

equipment are organized as corporations.

Specialization and the Division of Labor

In earlier centuries, especially in frontier areas, families in the

United States were much more self-sufficient, producing for themselves

most of the goods and services they consumed. But as the U.S. population

and economy grew, it became easier for people to buy more and more things

in the marketplace. Once that happened, people faced a choice they still

face today: In terms of time, money, and other things that they could do,

is it less expensive to make something themselves or to let someone else

produce it and buy it from them?

Over the years, most people and businesses realized that they could make

better use of their time and resources by concentrating on one particular

kind of work, rather than trying to produce for themselves all the items

they want to consume. Most people now work in jobs where they do one kind

of work; they are carpenters, bankers, cooks, mechanics, and so forth.

Likewise, most businesses produce only certain kinds of goods or

services, such as cars, tacos, or gardening services. This feature of

production is known as specialization. A high degree of specialization is

a key part of the economic system in the United States and all other

industrialized economies. When businesses specialize, they focus on

providing a particular product or type of product. For instance, some

large companies produce only automobiles and trucks, or even special

parts of cars and trucks, such as tires.

At almost all businesses, when goods and services are produced, labor is

divided among workers, with different employees responsible for

completing different tasks. This is known as division of labor. For

example, the individual parts of cars and televisions are made by many

different workers and then put together in an assembly line. Other well-

known examples of this specialization and division of labor are seen in

the production of computers and electrical appliances. But even kitchens

in large restaurants have different chefs for different items, and

professional workers such as doctors and dentists have also become more

specialized during the past century.

Advantages of Specialization

By specializing in what they produce, workers become more expert at a

particular part of the production process. As a result, they become more

efficient in these jobs, which lowers the costs of production.

Specialization also makes it possible to develop tools and machines that

help workers do highly specialized tasks. Carpenters use many tools that

plumbers and painters do not. Commercial bakeries have much larger ovens

and mixers than those used by people who only bake bread and pies once a

year. And unlike a household kitchen, a commercial bakery has machines to

slice and package bread. All of these tools and machines help workers and

businesses produce more efficiently, and lower the cost of producing

goods and services.

The advantages of specialization have led to the creation of many very

large production facilities in the United States and other industrialized

nations. This trend is especially prevalent in the manufacturing sector.

For example, many automobile factories produce thousands of cars each

day, and some shipyards employ more than 10,000 workers. One open-pit

mine in the western United States has dug a crater so large that it can

be seen from space.

When the market for a product is very large, and a company can sell

enough goods or services in that market to support a very large

production facility, it will often choose to produce on a large scale to

take advantage of specialization and division of labor. As long as

producing more in larger facilities lowers the average costs of

production, the producer enjoys what are known as economies of scale.

But bigger is not always better, and eventually almost all producers

encounter diseconomies of scale in which larger plants or production

sites become less efficient and more costly to operate. Usually that

happens because monitoring and managing increasingly larger production

facilities becomes more difficult. That is why most lar