Using idle resources differs from expanding productive potential.
Spare capacity means existing resources can produce more than they currently do. An increase in demand can bring idle labour and equipment into use without first expanding the economy's productive potential. Near bottlenecks, additional spending may create greater price pressure and a smaller output response. Potential output is an estimate of sustainable production given resources, technology and institutions, not a precisely observable mechanical ceiling. Better skills, capital and technology can raise it over time. A change in the slope used in a diagram is an assumption about responsiveness, not itself evidence that capacity changed.
- Actual output
- What is currently produced in a period.
- Spare capacity
- Existing resources can produce more than their current output.
- Potential output
- An estimate of sustainable production given productive resources, technology and institutions.
Apply the idea
Reading responsiveness
In these diagrams, the AS slope s measures the rise in the price index for one extra output-index unit. A slope of 2 is steeper than 0.5: it takes a larger price rise to bring out the same extra output, so supply is less responsive.
Near bottlenecks
The same demand increase can create more price pressure and less extra output when supply is less responsive.
No hard cap
Short-run production can differ from estimated potential. A reference line does not automatically impose a vertical supply boundary.
Longer-run improvement
Better skills, usable capital and technology can raise productive potential. Demand recovery alone may only improve utilisation.
| AS slope s | Initial Y / P | After demand shift +30: Y / P | Change |
|---|---|---|---|
| 0.5 | 100 / 100 | 120 / 110 | Output +20; price index +10 |
| 2 | 100 / 100 | 110 / 120 | Output +10; price index +20 |
Worked example: The same demand increase, two supply responses
Compare two AS schedules passing through Y = 100, P = 100: P = 100 + 0.5(Y - 100) and P = 100 + 2(Y - 100). In each, AD rises from P = 200 - Y to P = 230 - Y. Other assumptions are unchanged.
- With the more responsive AS schedule, equilibrium becomes Y = 120, P = 110.
- With the less responsive AS schedule, equilibrium becomes Y = 110, P = 120.
- The same demand shift produces a larger price-level rise and a smaller output rise when supply is less responsive. This illustrates a possible bottleneck effect, not a measured comparison between named countries.
- A reference marker at potential output Y = 130 is an estimate for discussion. It does not turn these sloping curves into a vertical hard cap or prove every output below it has identical inflation pressure.
Watch out for this
Using idle machinery automatically increases the economy's productive potential.
It raises actual utilisation. Potential output rises when productive resources, efficiency, technology or institutions improve.
Check your understanding
Which most directly expands productive potential rather than only using existing capacity?
- Selling previously unsold output from existing machines.
- Relabelling the output axis.
- Effective training that sustainably raises workers' productivity.