Productivity & Capacity Utilisation – A Level Economics B Edexcel Revision

Production

Production is what happens when businesses combine inputs, raw materials and components and process them to produce output of goods and services – ‘the production process’. Measured in terms of volume (e.g. 11.8 billion eggs produced in 2014) or in financial terms (e.g. UK egg production totalled 955mill in 2014).

Productivity Definition - is the Rate of production.

Another formula to learn!

State and explain the factors that influence productivity:

Investment - More money = better machinery = labour productivity increases.
New technologies/R&D - Better computers = improvements in productivity and reduced unit costs.
Human capital – education & skills training - Skills/ability of workforce (education and training and experience) = higher productivity. Compare MEDCs to LEDCs.
Management skills - Organising resources more efficiently/Infrastructure - Delays = productivity suffers. Using space efficiently, efficient supply/delivery network and organising your production line in the best way = high productivity.

All of these potential ways to increase productivity apply in every sector of the economy including;

Public (gov owned and run) and Private (own and run by private individuals) Sectors.
Primary sector – Extraction of natural resources (e.g. coal mining).
Secondary sector – Manufacturing of tangible goods (e.g.factories).
Tertiary sector – Provides intangible services and accounts for 76% of UK economic activity (e.g. banking).

Explain how increasing productivity affects competitiveness:

Increasing productivity = more can be produced using the same amount of resources. I.e. Average costs are reduced!
This brings competitive advantage as you can have lower prices, increased sales and better profit margins.
If rivals cannot match your productivity, they will struggle to match your prices and profits.
Having drawn ahead of competitors, you can stay there via reinvesting profits.
A good example of this in action is Apple.

- EXAM TIP- Do you see “The Domino Effect” here and how this stated point is explained fully with some context added?

This is how increasing productivity can give you a competitive adv.
From a gov/society’s point of view – increased productivity can lead to improved international competitiveness for a country’s economy.

Explain how more productive firms can afford higher wages:

When employees produce more, they are more valuable to a firm as they produce more to sell and thus boost profits.
Thus as productivity increases, salaries often do too.
Explain how higher productivity in an economy can boost GDP.
On a national level, the economy contains a fixed quantity of resources thus if productivity is increasing then GDP will be boosted as well.
Therefore productivity is closely related to standards of living and economic growth (higher productivity in an economy can boost GDP.
VIDEO EXAMPLE - http://bbc.co.uk/news/business-33347300

Labour intensive and capital intensive

Labour Intensive = Men>Machinery

Takes place where there is a plentiful supply of cheap/skilled labour (LEDCs!). Service sector tends to be characteristically LI.

Capital Intensive = Machinery>Men

Takes place where there is cheap/easy access to capital for investment with the aim of minimising production costs (MEDCs!).

Capacity Utilisation Definition / Formula - Another one to learn!

Ideal level = 90% (a buffer!)
>90% = over-utilisation. <90% = under-utilisation

The difference between full capacity and spare capacity:

Full capacity = all resources available are being used to the fullest extent all of the time.
Spare capacity = for some of the time some resources are not being used and therefore there is a loss of potential output.

The implications of under-utilisation of capacity…Consequences if capital utilisation is low? I.e. not producing as much as you potentially could?

Resources not used, production not as high as it could be. Machinery/workers are ideal! FC shared across a lower level of output and thus AC rise and profit margins squeezed!
For an economy/industrial capacity this is bad news! Not as competitive as it could be.

The implications of over-utilisation of capacity…Consequences if capital utilisation is too high? I.e. producing beyond your maximum?

Bottlenecks, breakdowns, worker pressure, overcrowding, accidents all reduce efficiency and raise average costs! E.g. Busy A&E dept on a Saturday night!
For an economy/industrial capacity this is bad news! Not as competitive as it could be.

Some ways of improving capacity under-utilisation. How can we improve under-utilisation of capacity? (i.e. under usage of machinery?)

Increase output – produce more to use up spare capacity. However, need to increase demand otherwise you’ll end up with excess supply!
Product development (extend product range) or market development (find a new market) can help increase demand.
Rent out spare machinery to other businesses! E.g. supermarket own labels ‘rent’ floor space in the Cornflakes factory.
Reduce the resources employed to adjust the capacity if under-utilisation is persistent

Some ways of improving capacity over-utilisation (i.e. over usage of machinery?)

Adjust production line to take care of bottlenecks (rationalisation).
Applies to management and supply networks – examine the way production is organised. Lean production (2.3.3 – next lesson) looks at this.
Waiting list for customers, refuse additional orders or increase prices to reduce demand are also solutions (think of a popular restaurant).
Increase working hours to increase capacity (e.g. Thorntons factory operates 24 hours a day for 3 days in the build up to Valentine’s day). Overtime is an easy solution.
Long term solution is to invest in increased capacity – capital equipment or human capital.
These solutions can fix things not only on a business level but on an economic level too. U/E Policies, Interest Rate Policies, Fiscal Policies (2.5 Economic Cycle) all help too!