In The Wealth of Nations, Adam Smith argued that "the division of labor [specialization] was limited by the extent of the market."(Bracketed remark added.) Which of the following best explains Smith's argument?
A) Specialization and the firm's moving down its average total cost curve requires that the demand facing the firm is sufficiently large.
B) Specialization and the firm's moving down its average total cost curve requires the firm to have increasing marginal costs.
C) Specialization and the firm moving down its average total cost curve requires the government to grant firm's legal monopolies.
D) Specialization and the firm moving down its average total cost curve will lead to the firm realizing economic losses.

Question

Quizplus · Accepted Answer

Adam Smith's argument implies that for specialization to be economically viable and for firms to benefit from economies of scale (moving down the average total cost curve), there must be a sufficiently large market to absorb the increased production. This ensures that the demand is adequate to justify the specialization and the associated costs.

In the Wealth of Nations, Adam Smith Argued That "The