The Importance of Capacity, Efficiency and Productivity (AQA A Level Business): Revision Note

Using capacity efficiently

• Efficiency means producing with the fewest possible resources

  • Using less time, labour, materials or energy

Why efficiency matters

• Lower costs per unit

  • Spending less on inputs increases profit margins or allows lower selling prices to compete better with rivals

• Higher competitiveness

  • Efficient firms can respond quickly to orders, which attracts and retains customer

• Better use of resources

  • Cutting waste frees up cash and reduces a business's environmental impact, meeting both financial and sustainability objectives

Ways to use capacity efficiently

Difficulties increasing efficiency

• Improving efficiency in production is not always easy

• Difficulties can arise for a range of reasons

Why increasing efficiency can be difficult

Efficiency and labour productivity

• Labour productivity is the amount of output each worker produces in a given period of time

  • Higher productivity means the same team turns out more products in the same working hours

• Labour productivity is expressed in units and is calculated using the formula

• Higher labour productivity leads to lower unit costs as long as wage rates remain the same

Ways to increase labour productivity

• Targeted training

  • Teach workers faster, safer or multi‑step techniques so they waste less time and make fewer errors

• Better tools and technology

  • Give employees equipment that speeds up routine tasks

• Performance incentives

  • Link pay or bonuses to clear output targets to encourage extra effort and focus

• Streamline processes

  • Remove wasted steps so workers spend more minutes on value‑adding activity

    • E.g., Zara reorganised cutting and sewing stages so fabric moves straight to assembly

Difficulties increasing labour productivity

• Low morale

  • Tired, stressed staff work more slowly, are absent more often and make more mistakes, limiting their productivity

• Skill shortages

  • Better tools and methods only help if employees have the right skills

  • Recruiting or training skilled workers can be slow and expensive

• Rigid work rules or union resistance

  • Employees' contracts may restrict task‑switching or new performance targets, reducing flexibility and slowing down change

    • E.g. London Underground’s plans to modernise stations has faced union action, delaying the introduction of multi‑skilled roles and new shift systems

• Learning curve for new technology

  • Installing new software or machines can cut output at first while staff learn and early glitches are fixed

Capital and labour intensive production

• Capital-intensive production mainly uses machinery and technology in the production of goods and services

  • Large-scale production of standardised products is likely to be capital-intensive

  • Manufacturing in developed countries where labour costs are relatively high is likely to be capital intensive

    • E.g. Car manufacturers such as Ford use robots and other production technology to manufacture vehicles, with supervisors overseeing the quality of output

• Labour-intensive production mainly uses physical labour in the production of goods and services

  • The delivery of services is usually more labour-intensive than manufacturing

  • In countries where labour costs are low (e.g. Bangladesh) labour-intensive production is common

  • Small-scale production is likely to be labour-intensive

    • E.g. UK schools are labour-intensive operations as teachers plan and deliver lessons and provide pastoral support

Evaluating capital- and labour intensive production