Richard, the best place to get to grips with an understanding of the meaning
of what you are calling Capacity in the context of business studies is a
cost and management accounting book ... such as mine!
You are right that maximum capacity is, eg, 168 hours a week for every
resource if a business works 24 hours a day, seven days a week. Of course,
not all businesses do work 168 hours a week so their maximum capacity
relates to their ordinary working week.
Then we need to refine the definition, along the lines of
ideal capacity
practical capacity
normal capacity
expected capacity.
ideal capacity is the absolute maximum as you have described and it is
rarely attainable in the long run
practical capacity takes a more realistic view of capacity by, eg, allowing
for planned maintenance, machine setups, meal breaks, training time, waiting
for materials, materials handling delays ... however, this view of capacity
takes a high rate of productivity view of life in that it should assume an
optimum level of production/utilisation time and minimum down time
normal capacity is a variation on the practical capacity and allows for a
less stringent view of down time: this is the level of capcity that will be
assumed by cost accountants as they are compiling standards, working through
budgets and so on
expected capacity is the level of capacity takes an even more relaxed view
than normal capacity and might take account of, eg, local conditions, union
agreements, special allowances for employees with disabilities ... the best
example of that to come out of the news over the last week is at Sunderland
AFC where Niall Quinn admitted that former manager Peter Reid had allowed
him to take life easier than new manager Howard Wilkinson will ... because
of Quinn's bad back!!
If you want to put percentages on all of this, for illustration only, we
might find as follows:
ideal capacity ... 100%
practical capacity ... 95%
normal capacity ... 93%
expected capacity ... 90%
This is business studies only, I'll leave the economists view to an
economist!
Best wishes
Duncan Williamson
----- Original Message -----
From: "Richard Young" <[log in to unmask]>
To: <[log in to unmask]>
Sent: Thursday, November 14, 2002 5:47 AM
Subject: Reconciling the defintion of capacity in economics and business
studies
This posting is for the pointy heads amongst us who agonise over shades of
meaning :)
I expect generosity in all replies - especially those highlighting any short
comings in my powers of reasoning :)
I am having difficulty reconciling the defintion of capacity as used in our
two subjects:
Capacity in Economics
================
As I understand it in Economics capacity is a concept encountered in macro
and help explain output gaps. Specifically
Potential or Trend GDP is the level of GDP produced if all resources are
used at their normal level of utilisation i.e. there is no overtime or shift
work·
Actual GDP is level of GDP produced.
Actual and potential GDP can diverge causing output gaps. The output gap is
the difference between actual output and potential output ·
A Positive output gap means actual output is above potential output and is
achieved by use of of overtime and or shift work. Inflationary pressure is
likely
A negative output gap means actual output is below potential output and
unemployment is likely because of spare capacity.
Capacity in Buiness Studies
==================
In Busines studies the focus is on the indvidual firm. My problem is that I
have not come across an agreed understanding of what capciaty means in Biz
text books. For most capacity is the amximum amount firms can produce with
current resoruces. If that is so how can there be over capacity and postiive
output gaps?
So my understaind is as follows:
Capacity is the maximum output of a firm where, given its current plant and
machinery, all workers are working normal hours, 5 days a week without shift
work or overtime.
Spare capacity is the difference between the firm's potential output and its
actual output. Spare capacity means firms have idle capital and an under
utilised workforce. Given fixed costs are spread over a smaller level of
output, unit costs are higher and competitiveness lost.
Where some workers or equipment are not fully used during normal working
hours there is space, idle or excess capacity.
If firms are delaying maintenance, operating overtime and shift work to meet
demand businesses are working beyond capacity
Capacity utilisation is the proportion capacity currently used in production
and is given by the equation current output/ maximum output x 100
In the short run firms can operate above capacity by
* staff working overtime or additional shifts Overtime and night shift
payments means unit costs of production begin to rise.
* Hiring temporary staff
* Sub contracting work to other firms
* Delaying maintenance increases the risk of a production line breakdown.
In the long run, firms can invest in new plant and machinery and hire more
staff to increase capacity.
Regards
Richard Young
AST Teacher of Business Studies, Economics & ICT
Deputy Head of VI Form - Year 12
Wood Green School
Woodstock Road
Witney OX28 1DX
Tel 01993 702355
Fax 01993 774961
www.woodgreen.oxon.sch.uk
BECTa/Guardian Secondary School Web Site of the Year 2001
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