Spare Capacity in Manufacturing

Spare capacity is a term that makes increasingly frequent appearances in AS macro multiple choice and data response questions. A survey from the British Chambers of Commerce finds that only 20% of manufacturing firms are operating at full-tilt whereas 40% of service sector businesses report that they are close to their capacity levels.

Spare capacity rises when orders and demand tails off leaving under-utilised capital and labour resources. We have seen this in the steep contraction in production in new housebuilding and in car manufacturing and this inevitably has knock-on effects for supply-chain businesses.

Operating below capacity can lead to a rise in the average fixed costs of production and therefore put pressure on profit margins. Little wonder that many manufacturing businesses have moved towards short-time working and have mothballed some of their production capacity.

This BBC Midlands news article covers a march for jobs in the West Midlands