Underutilisation: The Mystery of the Wasted Resource
Visualizing Scarcity and Choice: The PPC
To understand underutilisation, we must first understand the tool that reveals it: the Production Possibilities Curve (PPC)[1]. Imagine you have only 2 hours for after-school activities. You love both playing video games and reading. Your possible choices are:
- Option A: 2 hours of games, 0 hours of reading.
- Option B: 1 hour of games, 1 hour of reading.
- Option C: 0 hours of games, 2 hours of reading.
If you plot these points on a graph with "Video Game Hours" on one axis and "Reading Hours" on the other, and connect them, you get a simple PPC. This curve represents the maximum possible combinations you can achieve with your limited time. Any point on the curve is efficient. Any point outside the curve is impossible with your current resources (you can't magically have 3 hours in 2 hours!).
Now, what if you spend 30 minutes scrolling social media, then 1 hour gaming, and only 30 minutes reading? Your output (1 hour games, 0.5 hours reading) would be plotted inside the PPC. This is underutilisation—you wasted 30 minutes and didn't reach your potential.
Why Does Underutilisation Happen? Common Causes
Points don't just end up inside the PPC by accident. Several factors can pull an economy or project away from its efficient frontier.
| Cause | Description | Simple Example |
|---|---|---|
| Unemployment | When workers who are willing and able to work cannot find jobs. Their labor is a resource that is not being used. | A factory could run 24/7 with three shifts, but it only uses one shift because demand is low. 2/3 of its potential workforce is idle. |
| Idle Capital | Machines, buildings, or tools that are not being used at full capacity or are completely unused. | A school computer lab sits empty for half the day when it could be used for after-school clubs or community classes. |
| Inefficient Production Methods | Using outdated technology or poorly organized workflows that waste time and materials. | A group project where two students do all the work while others don't contribute. The group's total "output" is lower than if everyone worked efficiently. |
| Economic Recession | A widespread period of slow economic activity, leading to factories closing, workers being laid off, and resources lying fallow. | During a recession, a mall has many empty storefronts (idle capital) and fewer shoppers (low demand for retail workers' labor). |
| Mismatch of Skills | When workers have skills that are not needed by available jobs, or when machines are too specialized for a different task. | A expert coal miner may struggle to find work in a region that now focuses on solar energy technology, leading to underutilisation of their mining skills. |
The Mathematics of the PPC and Underutilisation
We can use simple math and algebra to make the PPC concept more precise. A common PPC is drawn as a curve that bows outward. A simpler version is a straight-line PPC, which assumes a constant trade-off (opportunity cost) between the two goods.
Let's say a farmer can use her land to grow only apples ($A$) or only oranges ($O$). With all resources devoted to apples, she can grow $100$ tons. With all resources devoted to oranges, she can grow $80$ tons. The equation for the straight-line PPC (the "frontier") is:
$A = 100 - \frac{100}{80}O$ or $A = 100 - 1.25O$
This means for every 1 ton of oranges she chooses to grow, she must give up 1.25 tons of apples. This is the opportunity cost.
- Efficient Point (on the curve): $A = 50$, $O = 40$. Check: $50 = 100 - 1.25(40)$ → $50 = 100 - 50$ → $50 = 50$. This point uses all resources fully.
- Underutilisation Point (inside the curve): $A = 50$, $O = 20$. Check: $50 = 100 - 1.25(20)$ → $50 = 100 - 25$ → $50 \neq 75$. The left side ($50$) is less than the right side ($75$). This means she is producing $25$ tons fewer apples than she could while still producing those 20 tons of oranges. Land, water, or labor is being wasted.
The underutilisation point can be represented as an inequality: $A + 1.25O < 100$. When the total "weighted output" is less than the maximum possible (100), the point is inside the PPC.
A Day at "Inefficient Pizza Inc.": A Practical Example
Let's apply everything to a concrete story. "Inefficient Pizza Inc." has a kitchen (capital), 4 workers (labor), and ingredients like dough and cheese (land/natural resources). In an ideal 8-hour shift, they can make a maximum of 80 pizzas or 160 salads, or a mix of both, as shown on their PPC.
One Tuesday, the following happens:
- One worker calls in sick, and no replacement is found (underutilisation of labor).
- The pizza oven is only turned on at noon, though the shift started at 10 AM (underutilisation of capital).
- The manager poorly organizes tasks, so workers often wait around for the next step (inefficient production).
At the end of the shift, they've produced only 30 pizzas and 40 salads. Plotting this combination (30, 40) would place it firmly inside their PPC. They used all their ingredients, but wasted time, worker hours, and machine hours. The consequence? Lower profits, less happy customers, and workers who feel bored and unproductive. If they could fix these issues and move to a point on their PPC, say (40, 80), they would be much better off without needing any new resources.
Important Questions
Q1: Can a point inside the PPC ever be a good thing?
Yes, sometimes it can be a temporary or strategic choice. For example, during a major repair, a factory may operate inside its PPC. Also, an economy might consciously choose to use fewer resources to reduce environmental impact, accepting lower output for sustainability. However, in standard economic analysis, it is still classified as underutilisation of productive capacity.
Q2: How is underutilisation different from a shift *in* the PPC?
This is a critical distinction. Underutilisation is a point inside a fixed PPC. A shift of the entire PPC outward means the economy's maximum potential has grown due to more resources, better technology, or improved education. A recession (high underutilisation) moves the economy inward from the frontier. Economic growth moves the frontier outward. They are different concepts.
Q3: Does underutilisation only apply to whole countries?
Not at all! The PPC is a versatile model. It can apply to an individual (time between study and leisure), a family (budget between food and entertainment), a business (resources between two product lines), or a national economy (resources between consumer goods and military goods). Anywhere there are scarce resources and choices, the concept of underutilisation can be relevant.
Moving from Underutilisation to the Frontier
How can an economy or business move from an inefficient point inside the PPC to a point on the frontier? The solutions often directly address the causes:
- Reducing Unemployment: Government policies to stimulate job creation, or job training programs to help workers match available jobs.
- Utilizing Idle Capital: Renting out unused office space, sharing community tools in a "library of things," or running factory machines for extra shifts.
- Improving Technology and Management: Adopting better software, training workers in efficient methods, or reorganizing workflows to eliminate bottlenecks.
- Ending a Recession: Governments and central banks can use fiscal policy (like spending on projects) and monetary policy (like adjusting interest rates) to boost overall demand in the economy.
The movement from a point inside the PPC to a point on the PPC is called efficiency gain. It is a "free" improvement because it doesn't require new resources, just better use of existing ones.
Footnote
[1] PPC (Production Possibilities Curve/ Frontier): A graphical model that shows the different combinations of two goods or services that can be produced using all available resources efficiently. It is the fundamental model for illustrating scarcity, choice, opportunity cost, and efficiency in economics.
[2] Opportunity Cost: The value of the next best alternative that is given up when making a choice. On a PPC, it is represented by the slope of the curve—how much of one good you must sacrifice to get more of the other.
[3] Efficiency: In economics, productive efficiency means producing the maximum possible output from a given set of resources. This is represented by any point on the PPC.