What is the excessive capacity in business?

Excessive capacity concerns production capacity that falls below the potential capacity available to the manufacturer. For example, if a Widget factory can produce 100 widgets per hour and produces only 70 widgets per hour, it would be an excessive capacity as the company produces under its capacity. There are several ways to assess the use of capacity, and many governments monitor this metric of performance because it can provide useful information about the state of industry. This can be a good thing for consumers, as the price of the product will also remain relatively low. Low demand can also be a sign that the economy is experiencing turbulence and that consumers are reluctant to buy new products. Excessive capacity can sometimes be a warning that consumers are reluctant to buy because they are afraid of economies.

For producer, excessive capacity can be a problem. Many production costs are fixed; Whether someone makes 100 units or 1000 units, the costs will be the same. One of the examples areAt the cost of purchasing or renting equipment where products can be produced. When the manufacturer produces products under the capacity, the cost of production on the product average high costs. The producer may be reluctant to increase prices to prevent depressive demand of consumers, and as a result its profit margins are diminishing.

One way to look at the use of capacity is to explore the technical limitations of the product production. For example, if the factory line is able to produce 1,000 units per hour, the technical capacity of the factory would be 1,000 units per hour. Production less than this number of units would indicate excessive capacity and indicated that the company would strangle the production because it does not want to end up with a surplus of inventories.

Economic analysis can also be used. In this case, the analyst is looking for a point at which the average cost per unit of production cannot be reduced. This is a production chapAcita. When companies produce under this level, the cost per unit is higher than they could be and the company is in an excessive capacity. The remaining at this level of production could end the company's money, as this may have difficulty in meeting the fixed overhead costs.