The measurement and management of capacity utilisation, labour productivity and efficiency, the causes and consequences of under- and over-utilisation, economies and diseconomies of scale, and ways to improve productivity and efficiency.

What this theme is asking

OCR wants you to measure how fully a firm uses its resources (capacity utilisation), how productive its labour is, and to explain how efficiency can be improved and how scale affects unit cost. Capacity utilisation and productivity are calculation skills that appear in Components 1 and 2.

Capacity utilisation

Utilisation matters because fixed costs (rent, machinery, salaries) are spread over output. The higher the utilisation, the lower the fixed cost per unit, so unit cost falls. But utilisation can be too high: at or near $100\%$, there is no slack for maintenance, no flexibility to take extra orders, and staff and machines are under strain, which can raise breakdowns and errors. Many firms aim for around $85$ to $90\%$ as a balance.

Labour productivity

Higher labour productivity means each worker produces more, so the labour cost per unit falls even if wages stay the same. It is therefore a key lever on unit cost and competitiveness. Productivity can be raised through training, better technology, stronger motivation, and improved processes and organisation.

Under- and over-utilisation

Economies and diseconomies of scale

As output rises, economies of scale lower average cost: bulk-buying inputs, spreading fixed costs over more units, using specialist machinery and managers, and cheaper finance. Beyond a certain size, diseconomies of scale raise average cost: communication and coordination become harder, decision-making slows, and staff feel remote and less motivated. The firm must manage growth so that economies are not overtaken by diseconomies.

Ways to improve productivity and efficiency

A firm can raise productivity and efficiency through: investment in technology and automation (machines work faster and more consistently); training (skilled workers produce more with fewer errors); motivation (engaged staff work harder, with lower absence and turnover); and lean techniques that cut waste from processes. The trade-off is that some of these (technology, training) need up-front investment, and pushing staff too hard can backfire.

Examples in context

A budget airline runs near-full capacity (high load factors) to spread the huge fixed cost of aircraft over as many passengers as possible. A car plant invests in automation to raise labour productivity and cut unit cost. A restaurant quiet on weekday lunchtimes is under-utilised, spreading its rent over too few covers, which is why many offer lunchtime deals to lift utilisation.

Try this

Q1. A firm produces $1{,}800$ units with a maximum capacity of $2{,}000$. Calculate its capacity utilisation. [2 marks]

• Cue. $\tfrac{1{,}800}{2{,}000} \times 100 = 90\%$.

Q2. Analyse one way a firm could raise labour productivity. [6 marks]

• Cue. For example, training raises each worker's output and reduces errors, lowering labour cost per unit, developed as a chain in context.