2.3.2 capacity utilisation Flashcards
What is capacity utilisation?
The extent to which the productive capacity of a business is used.
How is capacity utilisation calculated?
(Actual level of output / Maximum possible output) x 100
What can capacity utilisation be used to measure?
Productive efficiency.
When a business is operating at higher capacity, average costs of production fall.
When does a firm operate at full capacity?
When all resources are being used to their maximum potential.
What are 2 factors that can increase the maximum capacity of a firm?
- Advancements in technology
- Increase in the level of investment
Why might a firm operate below maximum capacity? [4]
- Changes in level of demand in the economy
- Loss of market share
- Inefficiency
- Maximum capacity has increased
What are some solutions to working to full capacity? [6]
- Encouraging employees to work overtime
- Employ more staff
- Spend less time on maintaining production equipment
- Entering new markets
- Expanding range of products
- Produce products from other business in the form of own brand goods
How can operating near to or at full capacity affect quality? [2]
- Due to rushed production process
- Employees may become demotivated and stressed due to increasing pressure to work at a high capacity
How does working at full capacity affect a firm’s response to demand?
It removes its ability to quickly respond to changes in demand. If demand increases, the firm can only increase production to meet demand if it has spare capacity.
How can a firm become less competitive from under-utilised capacity?
Fixed costs are divided by a lower level of output, and so average fixed costs per unit increases and profitability falls. Prices might increase and therefore a firm becomes less competitive.
What are some benefits to under-utilised capacity? [2]
- Has more flexibility to change level of output as and when it is needed
- Has time to fix machines without stopping production
When is capacity over-utilised?
When the firm attempts to produce more than it is capable of.
What is the issue with over-utilisation?
Average costs increase due to falling levels of efficiency, this could be due to breakdowns and overcrowding in production process.
