Excess Capacity

What is 'Excess Capacity'

Excess capacity is 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Capacity Requirements Planning ...

    An accounting method used to determine the available production ...
  2. Aggregate Capacity Management

    The process of planning and managing the overall capacity of ...
  3. Capacity Management

    The management of the limits of an organization's resources, ...
  4. Fiscal Capacity

    In economics, the ability of groups, institutions, etc. to generate ...
  5. Capacity Utilization Rate

    A metric used to measure the rate at which potential output levels ...
  6. Activity Capacity

    The degree to which a particular action is expected to perform. ...
Related Articles
  1. Investing

    Calculating the Capacity Utilization Rate

    Capacity utilization rate is a ratio used to compare a current usage level against a maximum potential level.
  2. Markets

    What is Capacity Utilization Rate?

    The capacity utilization rate shows how much a firm or economy is producing as a percentage of what it’s capable of producing.
  3. Investing

    Capacity Utilization: A Strike Against Rate Hikes

    Despite a recent jump in certain prices indices, capacity underutilization suggests inflation is not a threat, and a more dovish Fed should be welcomed.
  4. Financial Advisor

    Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  5. Is It Time To Short This Industry Favorite?

    A combination of capacity growth, higher fuel prices and worries about the health of the global economy have sent airline stocks skidding this year. The US Global Jets ETF (NYSE:JETS) is down ...
  6. ETFs & Mutual Funds

    3 Reasons Why XLE & USO's Performances Will Be Limited

    Discover the three reasons why the United States Oil Fund and the Energy Select Sector SPDR Fund will likely underperform after the first quarter of 2016.
  7. One Airline Ready To Fly Higher And One Not Cleared For Takeoff

    A combination of capacity growth, higher fuel prices and worries about the health of the global economy have sent airline stocks skidding this year. The US Global Jets ETF (NYSE:JETS) is down ...
  8. Markets

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  9. Markets

    Leading Economic Indicators for Oil Prices

    The factors that determine the price of oil are supply and demand. Their leading indicators can help investors and traders forecast future price movements.
  10. Markets

    How Oil Will React To A Revolution In Venezuela

    The downward trend of the price of oil over the past year is having devastating consequences for the Venezuelan economy, causing political unrest and increased opposition to the socialist Maduro ...
RELATED FAQS
  1. Does the law of diminishing marginal returns only apply to labor?

    Learn more about how the law of diminishing returns is used by economists and businesses. Find out more about the laws of ... Read Answer >>
  2. How long should an expansionary economic policy be implemented?

    Finding the optimal time period to end expansionary economic policy is an urgent issue; the key is found with capacity utilization. Read Answer >>
  3. Is there any way to reverse the law of diminishing marginal returns?

    Learn more about how consumer spending, supply and demand impact production decisions. Find out more about the law of diminishing ... Read Answer >>
  4. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  5. How can you calculate diminishing marginal returns in Excel?

    Learn more about production costs and applying the law of diminishing marginal returns using Excel. Find out more about how ... Read Answer >>
  6. What economic indicators should be monitored when investing in the industrial sector?

    Discover the economic indicators to monitor when investing in the industrial sector. The industrial sector is cyclical and ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center