Capacity – the maximum amount a firm can produce with existing resources.
Full capacity was when all the resources available to the firm are being used to the fullest extent. Spare capacity is when some of the resources are not being used to the fullest extent so there is a loss of potential output.
Capacity utilisation – the proportion of that current output is of the full capacity.
When this percentage is less than 100% it shows that there is under-utilised capacity. There are some benefits to under-utilised capacity. For example, the firm has more flexibility to change its level of output as and when it is needed, and the firm has time to fix machines without stopping production.
Problems with spare capacity
- Workers and machines are not fully used (i.e. wastage) so wastage
- Higher unit costs as fixed costs (overheads) are spread over fewer units of output
- The business may have to charge to charge higher prices to cover the increased costs – reduced competitiveness.
How to reduce spare capacity
- Extend product range – use spare machines/labour
- Rent out spare buildings
- Find new markets or diversify
- Cut capacity – close premises, sell machinery or make workers redundant
Over-utilisation of capacity – the firm is trying to produce more than its equipment and workers can do.
This causes average costs to be higher due to machine breakdown being more frequent as the machines are overworked. This also makes the business less competitive as their costs will rise.
- Outsourcing work e.g. contracting from an agency
- Employing more workers (seasonal basis)
- Buying more machines for production