excess capacity

excess capacity

Fig. 63 Excess capacity. Under the imperfect market conditions of monopolistic competition, the equilibrium (PROFIT MAXIMIZING) position for the firm is at a point (Q_e) to the eft of the cost-minimizing point (Q_c) on the long-run average total cost curve; industry output is less, and costs are higher than the optimum position. Thus ‘excess capacity’ is measured as the difference between actual industry output and the cost-minimizing level of industry output (distance AB).

excess capacity

1. 1a situation where a firm or industry has more plant to supply a product than is currently being demanded. As a result a proportion of the firm or industry's CAPACITY is left idle. Excess capacity can result from a temporary (short-run) downturn in demand, a secular (long-run) fall in demand, or from the industry having overinvested in new plant relative to long-run demand potential. In the latter two instances, excess capacity may be eliminated by an intensification of competitive pressures (see EXCESS SUPPLY), which forces the more inefficient suppliers to exit the industry, or by RATIONALIZATION schemes.
2. in economic theory, the cost structures of firms operating in imperfect markets. Industry output is maximized (that is, full capacity attained) when all firms produce at the minimum point on their long-run average total cost curves (see PERFECT COMPETITION). See Fig. 63 for the effect of MONOPOLISTIC COMPETITION.