That the division of labor is limited by the size of the market best applies to which explanation of trade:

 Options:

a. Factor endowment theory b. Product life cycle theory c. Economies of scale theory d. Overlapping demand theory

The Correct Answer Is:

c. Economies of scale theory

c. Economies of scale theory:

For example, let’s say a small bakery produces 100 loaves of bread a day. Their equipment, staff, and other costs are all geared towards this level of production.

If the market suddenly expands and they start selling to a national or international market, they can increase production to 1000 or 10,000 loaves a day without proportionally increasing their fixed costs.

This means each loaf of bread costs less to produce, and they can sell it at a lower price while still making a profit.

This theory directly ties into trade because it explains why companies often seek to expand their market reach through international trade. By tapping into larger markets, they can produce more efficiently, reduce costs, and ultimately offer more competitive prices to consumers.

Why other options are not correct:

a.   Factor endowment theory:

This theory argues that countries specialize in producing goods and services that utilize their abundant resources.

For instance, a country rich in natural resources might focus on industries like mining or agriculture. While this theory is important in understanding why countries specialize in certain industries, it doesn’t directly address how the size of the market affects the division of labor. It’s more about the resources a country has, rather than the size of the market it serves.

b.  Product life cycle theory:

This theory suggests that a product goes through different stages in its life, from introduction to growth, maturity, and decline. Different stages require different levels of production and specialization.

While this theory is relevant for businesses managing their product lines, it doesn’t directly relate to how the size of the market affects the division of labor.

d.  Overlapping demand theory:

This theory looks at how countries with similar demand patterns can benefit from trading with each other. It’s based on the idea that countries with similar preferences for goods and services can specialize in producing certain items and trade with one another.

While this theory is useful in explaining trade relationships. It doesn’t directly address how the size of the market influences the division of labor.

Related Posts 

• Collegiate Sports Quiz with Answers – MCQs (Multiple Choice Questions) | Sports Management
• Social Stratification – Historical Origins, Theoretical Perspectives, Forms, Consequences, MCQs | Sociology