Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Capacity utilisation: d) Ways of improving capacity utilisation
Improving capacity utilisation involves increasing current output or adjusting maximum capacity.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 4 of 4
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Improving capacity utilisation involves increasing current output or adjusting maximum capacity. To resolve under-utilisation, a business can stimulate demand through marketing, reduce prices, or accept subcontracted work. Alternatively, it can rationalise by selling surplus assets or downsizing the workforce, thereby reducing maximum capacity. To resolve over-utilisation, a firm can expand its maximum capacity by investing in new machinery, extending premises, or hiring more staff.
For example: A hotel experiencing under-utilisation during winter might offer discounted weekend breaks to increase bookings, or close an entire floor to reduce heating and staffing costs, effectively improving its utilisation rate.
What earns the marks
- Subcontracting work to other firms can quickly resolve over-utilisation without permanent capital investment.
- Taking on subcontracted work from competitors can increase output and resolve under-utilisation.
- Rationalisation, such as selling unused machinery or closing branches, reduces maximum capacity and increases the utilisation percentage.
- Stimulating demand through promotional campaigns or price cuts increases current output, improving utilisation.
- Expanding capacity through capital investment resolves over-utilisation but requires significant time and finance.
Common mistakes and how to put them right
Stating that increasing prices will improve capacity utilisation.
Put it right: Increasing prices typically reduces demand and output, which would worsen under-utilisation.
Confusing subcontracting out with taking on subcontracted work.
Put it right: Subcontracting out reduces the burden of over-utilisation, while taking on subcontracted work helps cure under-utilisation.
Assuming rationalisation increases output.
Put it right: Rationalisation reduces the denominator (maximum capacity) in the formula, improving the utilisation rate without increasing output.
Exam tips
- Clearly distinguish between methods that change current output and methods that change maximum capacity.
- Evaluate the time lag involved in different methods, such as the immediate effect of price cuts versus the long-term nature of building a new factory.
- Consider the impact of rationalisation on employee morale and future flexibility when assessing ways to improve utilisation.
Try the lesson
The start of the Capacity utilisation: d) Ways of improving capacity utilisation lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following is a direct method a business could use to improve its capacity utilisation if it is currently operating at 60%?
Listen
Improving capacity utilisation involves increasing current output or adjusting maximum capacity. To resolve under-utilisation, a business can stimulate demand through marketing, reduce prices, or accept subcontracted work. Alternatively, it can rationalise by selling surplus assets or downsizing the workforce, thereby reducing maximum capacity. To resolve over-utilisation, a firm can expand its maximum capacity by investing in new machinery, extending premises, or hiring more staff. For example, a hotel experiencing under-utilisation during winter might offer discounted weekend breaks to increase bookings, or close an entire floor to reduce heating and staffing costs, effectively improving its utilisation rate. A strong answer earns marks for these points. Subcontracting work to other firms can quickly resolve over-utilisation without permanent capital investment. Taking on subcontracted work from competitors can increase output and resolve under-utilisation. Rationalisation, such as selling unused machinery or closing branches, reduces maximum capacity and increases the utilisation percentage. Stimulating demand through promotional campaigns or price cuts increases current output, improving utilisation. A common slip: Stating that increasing prices will improve capacity utilisation. Instead, Increasing prices typically reduces demand and output, which would worsen under-utilisation. Exam tip: Clearly distinguish between methods that change current output and methods that change maximum capacity.
Key words
Say what each word means before you turn the card.
Rationalisation
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Subcontracting
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Stimulating demand
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Expanding capacity
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See every definition
- Rationalisation
- Selling surplus assets or downsizing the workforce, thereby reducing maximum capacity so that it aligns with current demand.
- Subcontracting
- Taking on subcontracted work from competitors can increase output and resolve under-utilisation, while subcontracting work out can quickly resolve over-utilisation.
- Stimulating demand
- Increasing current output through promotional campaigns or price cuts, which improves utilisation.
- Expanding capacity
- Investing in new machinery, extending premises or hiring more staff to resolve over-utilisation, though this requires significant time and finance.
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