Excess Capacity

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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.

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.

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