Economics Theme 2.3.2 Flashcards
How is maximum output reached
The maximum amount of output achievable if all resources are fully utilised
How can capacity be reached
In the long run capacity can be increased by acquiring more resources e.g. bigger premises, more machinery, introducing a 3rd shift
How can capacity be reduced
In the long run capacity can also be reduced by downsizing resources e.g. laying off workers, smaller premises, less machinery
what does a buisness aim for
A business will aim to match capacity to demand
What is capacity utilisation
Capacity utilisation is a measure of the percentage of potential output being achieved
Percentage of seats occupied at a football match
Percentage of t-shirts manufactured
How is capacity utilisation calculated
Current output / maximum possible output x 100
What is theeffect of under utilisation of capacity
Under utilisation of capacity will mean that resources are not being made to work effectively for the business, this will result in high unit costs
What is the effect of over utilisation
Over utilisation of capacity will mean the firm is “sweating “ its assets i.e. they are being made to work hard for the business
This will result in lower unit costs
But may affect quality and cause stress to the resources e.g. workers being pushed to work hard or no maintenance time for machinery
What is the importance of capactiy
Ability to match supply to demand
Inverse relationship between capacity utilisation and unit costs
Image / public perception
Workforce motivation
Ability to achieve business objectives
How do buisnesses improve capacity utitilastion- under utilisation
increase demand
Downsize e.g. sell off assets or rationalise the workforce
Lease off spare capacity
How do buisnesses improve capacity utitilastion- over utilisation
Reduce demand
Outsource parts of the business’ operations
Increase capacity by investing in more resources
