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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