Q&A - What is capacity utilisation and why is it important?

Capacity utilisation measures the extent to which a business is using its production potential.

Capacity utilisation can be defined as - the percentage of total capacity that is actually being achieved in a given period

Capacity utilisation ( which is traditionally expressed as a percentage) is calculated using this formula:

Capacity utilisation is an important concept because:

- It is often used as a measure of productive efficiency
- Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive
- So firms usually aim to produce as close to full capacity (100% utilisation) as possible

It is important to remember that increasing capacity often results in higer fixed costs. A business should aim to make the most productive use it can of its existing capacity.

The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology.