Final answer:
Adam Smith's concept of division of labor allows for efficiency and economies of scale but is limited by the market size. Larger markets can support more specialization and lower production costs, whereas smaller markets constrain the extent of labor division due to insufficient demand.
Step-by-step explanation:
Adam Smith introduced the concept of division of labor, which refers to dividing work into discrete tasks, allowing workers to specialize. This specialization increases efficiency and productivity, leading to economies of scale. However, the extent to which labor can be divided is limited by the size of the market. A larger market allows for increased specialization because it can sustain the production of more units, leading to a lower average cost per unit and making production more cost-effective.
For example, in a small market, a factory producing only 100 cars would incur high costs per car. In contrast, in a larger market, a factory producing 50,000 cars could establish an assembly line with specialized workers, thus reducing the average production cost per car. In essence, the market size constrains how far labor can be divided and specialized; without sufficient demand, the benefits of division of labor cannot be fully realized.