Productivity & Capacity Utilisation


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.

Productivity & Capacity Utilisation, figure 1

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.


Productivity & Capacity Utilisation, figure 2

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!).

Productivity & Capacity Utilisation, figure 1

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!