Question

An economy operating its plant and equipment at full capacity implies a capacity utilization rate of ( LO5) a) 40 percent c) 85 percent b) 70 percent d) 100 percent

Short answer

d) 100 percent

Step-by-step solution

Understand capacity utilization rate

Capacity utilization rate is a percentage measurement that indicates the level of production in an economy compared to the potential output if all resources were utilized efficiently. In other words, it shows how much of the total productive capacity is being used at a given point in time.

Determining the meaning of full capacity

Full capacity refers to a situation in an economy when the utilization of available resources is maximized, and the economy is producing at the highest level possible without causing undue strain on resources or risking negative side effects such as inflation. So, when an economy is operating at its full capacity, it means that it is making the most out of its resources, and the capacity utilization rate should be at the highest level possible.

Analyze the given options

We are given four options for the capacity utilization rate when an economy operates its plant and equipment at full capacity: 40%, 70%, 85%, and 100%. We are supposed to identify the percentage that represents full capacity.

Choose the correct answer

Since full capacity represents the maximum possible capacity utilization, the correct answer is the highest possible percentage in the options provided:\ d) 100 percent. This means that when an economy is operating its plant and equipment at full capacity, the capacity utilization rate is 100%.

Key concepts

Full Capacity

When we talk about full capacity in an economy, we're referring to a situation where all available resources are being used as efficiently as possible. This means that things like machinery, labor, and raw materials are utilized at their peak levels to produce the maximum output.
Full capacity doesn't mean pushing all resources to their absolute limits; instead, it means striking a balance where all resources work in harmony to produce the best possible results without causing any harm.

• Every machine is running optimally without overheating or breaking down.
• Workers are actively engaged without being overstressed.
• There's no more unused potential left in the system.

Reaching full capacity is a desirable state because it indicates an economy is fully leveraging its resources. However, operating at full capacity for too long can risk causing inflation, as demand might overtake supply, thus driving up prices.

Economic Production

Economic production involves the process of using resources like land, labor, and capital to create goods and services that meet the needs and wants of consumers. It is the engine driving economic growth.
Imagine the economy as a large factory, and economic production is what keeps that factory bustling with activity.

• Resources are inputs used to create goods and services.
• Efficiency in production determines how well these resources are turned into output.
• Maximizing production at full capacity means using all inputs without wastage.

By optimizing their economic production, businesses can better satisfy market demands, increase their profits, and contribute more significantly to the overall economy. Efficient production not only boosts individual companies but also lifts the broader economy.

Resource Utilization

Resource utilization refers to how effectively an economy uses its available resources, such as labor, raw materials, and machinery, to produce goods and services.
It's like ensuring every dollar spent on production adds value or generates favorable returns.

• High resource utilization means most resources contribute to production.
• Low resource utilization indicates potential wastage or inefficiencies.
• Aiming for full resource utilization helps the economy reach its full capacity.

Better resource utilization can lead to an increase in productivity, helping economies grow without necessarily increasing the industries' capacity. However, it's essential to maintain a balance to avoid overuse, which can lead to wear and tear of resources, ultimately disrupting production.