Capacity

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DEFINITION of 'Capacity'

The maximum level of output of goods and/or services that a given system can potentially produce over a set period of time. In most cases, it is unlikely that any system will operate at full capacity for prolonged periods, because natural inefficiencies and other factors decrease potential output.

BREAKING DOWN 'Capacity'

The widget manufacturer may be able to produce 150,000 widgets in a month. However, due to downtime because of equipment maintenance and worker illness, only about 130,000 widgets can actually be produced per month. Over the long run, a business can increase its capacity and output by acquiring more factors of productions. For example, if market demand for widgets spikes, the widget manufacturer can buy more equipment and hire more workers, and thus increase its capacity to 175,000 widgets per month.

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