Capacity and Capacity Utilization in Production Economics
The concepts of capacity and capacity utilization (CU) help explain many economic phenomena, including investment behavior, productivity measurement, inventory behavior, entry/exit into an industry, market power, pricing, and profitability. This chapter p
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Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conceptual Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technological Approach to Defining Capacity and CU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An Economic Optimization Approach to Defining Capacity and CU . . . . . . . . . . . . . . . . . . Additional Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Capacity and Utilization-Related Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Measurement of Capacity and CU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Macroeconomic Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Microeconomic Frontier-Based Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Microeconomic Optimization-Based Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Keywords
Capacity · Capacity utilization · Dual measures · Primal measures · Quasi-fixed inputs
Introduction The concepts of capacity and capacity utilization (CU) help explain many economic phenomena, including investment behavior, productivity measurement, inventory
D. Squires Department of Economics, University of California San Diego, La Jolla, CA, USA e-mail: [email protected] K. Segerson () Department of Economics, University of Connecticut, Storrs, CT, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 S. C. Ray et al. (eds.), Handbook of Production Economics, https://doi.org/10.1007/978-981-10-3450-3_7-1
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D. Squires and K. Segerson
behavior, entry/exit into an industry, market power, pricing, and profitability [35, 107, 124, 132, 136, 166]. These concepts are sometimes employed to indicate the strength of aggregate demand, especially throughout the business cycle and consequent inflationary pressures, and the exploitation pressures placed upon renewable resource stocks. Understanding the role of measured capacity in economic fluctuations also helps understand theories of the business cycle. Central banks, such as the Federal Reserve Board in the United States, other government economists, and academic macroeconomists and industrial organizational economists developed the early notions of capacity to address these issues. 1 Similarly, capacity utilization has been studied within the contexts of operations research and business strategy [27, 103, 124]. Capa
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