It measures what proportion or percentage of theoretical maximum output is actually produced
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What is full capacity?
All the resources available to the firm are being used to the fullest extent all of the time
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What is spare capacity?
For some of the time some resources are not being used and therefore there is a loss of potential output
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How is capacity utilisation calculated?
Current output / Maximum possible output x 100
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What is under-utilisation of capacity?
Capital equipment is lying idle some of the time which is wasteful and means that productivity is lower than it could be
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How does under-utilisation of capacity have an effect on the business?
The business is producing less than it could so average costs rise because fixed costs are shared across a lower level out output, so the business is not as competitive as it could be
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What is over-utilisation of capacity?
The business is trying to produce more than its capital equipment was designed for
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How does over-utilisation of capacity have an effect on the business?
Average costs will be higher than necessary because breakdowns and overcrowding reduce efficiency so the business is not as competitive as it could be
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What are some ways businesses can reduce under-utilisation of capacity?
Extend the product range and promote new products, focus on marketing to increase demand, rent excess capacity to other businesses and close excess capacity
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What are some ways businesses can reduce over-utilisation of capacity?
Identify and tackle shortages, recruit more employees, outsource some production to other businesses, train more labour and invest in increased capacity
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Other cards in this set
Card 2
Front
What is full capacity?
Back
All the resources available to the firm are being used to the fullest extent all of the time
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