Capacity Utilisation

Capacity Utilisation

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Full Capacity and Spare Capacity

Capacity Utilisation

= (actual level of output / maximum possible output) x 100

  • This refers to the extent to which companies are operating at the productive capacity and can therefore be used to measure productive efficiency
  • Average costs of production tend to fall when businesses operate at a higher capacity as a result of them becoming more competitive
  • Lower costs of production encourages firms to operate closely to full capacity
  • Full capacity – when all resources are employed to its maximum potential
  • Factors increasing maximum capacity of a firm: advancements in technology, level of investment

Implications of under and over-utilisation of capacity

Under Utilisation: why may firms operate below full capacity?

  • There are changes in the level of demand in the economy – lower levels of demand
  • Loss of market share
  • Inefficiencies
  • Technological Advancements have not yet met an increase in demand
  • Average fixed costs per unit increase as fixed costs are divided by a lower level of output; profits are likely to fall and firms become less competitive
  • Under utilisation offers firms with more flexibility regarding its level of output

Over Utilisation: why may firms over utilise?

  • Firms may try to produce more than its capital is capable of
  • Due to increases in inefficiencies, average costs may also rise

Ways of improving capital utilisation

  • Firms can enter new markets
  • Expanding the range of products offered to consumers
  • Increase their demand by using promotions


Quick Fire Quiz – Knowledge Check

1. Identify how the formula used to calculate Capacity Utilisation (2 marks)

2. Explain what is meant by ‘Capacity Utilisation’ (4 marks)

3. Define ‘Full Capacity’ (2 marks)

4. Identify two factors increasing the maximum capacity of a firm (2 marks)

5. Explain why firms may operate below full capacity (4 marks)

6. Explain why firms may operate above full capacity (2 marks)

7. Identify three ways of improving capital utilisation (3 marks)


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