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Definition of 'Excess Capacity'
A situation in which actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market.
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Investopedia explains 'Excess Capacity'
The amount of excess capacity within an industry is a signal of both the health of that industry and the demand for the products it produces. Excess capacity is also seen as a good thing for consumers, as it is not likely to lead to the price inflation that would be seen in periods of near-full capacity. A company with sizable excess capacity can often lose a considerable amount of money if it is not able to meet the high fixed costs that are associated with producers.
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Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
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