Copyright

Potential Output in Economics: Definition & Overview

Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we will explore the term potential output. We will define the term and look at what factors need to be considered in order to reach potential output. The lesson will be concluded with a summary and a quiz.

A First Look at Potential Output

Let's take a moment to imagine you are the owner of a car factory. You know that in order to fulfill the orders for new cars all of your equipment must be in good working condition and updated with the most current technology available. You also know that you need to utilize your resources efficiently so that you can create as many cars as there are supplies. And lastly, you know that your employees need to be doing their jobs and working in a productive manner. If all of these characteristics are met, then it is said that you are fulfilling potential output.

Potential output is what an economy can produce if it is using all of its resources. These resources include technology, equipment, natural resources, and employees.

For example, as the owner of the car factory trying to fulfill potential output, you wouldn't want to use an outdated machine that is slow and can only output two cars a week, if you have brand new one sitting in storage that is really fast and can output 20 cars a week. You would not be functioning at potential output with your old machine because you have the potential to produce more with the new machine.

The same can be applied to your employees. If you only have two employees working while the other 10 are napping, you would not be reaching potential output. All employees need to work efficiently.

Considerations of Potential Output

It is important to explain that potential output is not the same as the maximum output. In other words, it does not mean that a company is maximizing all of its resources. For example, take the car factory above. You could force your workers to work longer hours and come in on the weekend. However, that would result in a negative outcome. Instead, you need to understand what a good economic performance is for your company and work to reach that target. This simply means, a company needs to know what a good target output is for them and then utilize their resources in a manner to meet that target. They do not need to maximize all of their resources to reach that target.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support