CandleFocus Glossary Editor
Excess capacity is a concept used to describe the state of an economy when there is more capacity to produce goods and services than is needed to meet the current market demand. If there is more production capacity than consumer demand in an economy, it is said that there is excess capacity. This can be both a positive and a negative situation, depending on its severity.
For example, when there is a healthy level of excess capacity it indicates that manufacturing industry, businesses, and the service sector are flourishing, and that inventories are low enough to sustain future shipments to customers. In addition, when an economy is experiencing a healthy level of excess capacity it may have potential to grow because businesses have the ability to begin meeting increased demand.
On the other hand, when an economy experiences an excessive level of excess capacity it can lead to low aggregate demand in the economy, stifling economic growth. This can lead to reduced output, fewer investments, and job losses for not just the businesses directly affected but for other businesses as well, resulting in deflationary economic pressures.
Excess capacity can occur for many reasons. Low consumer demand resulting from slow economic growth, technological advancements, or saturation of a product can lead to excess capacity. Excess capacity can also be caused when businesses anticipate increased levels of production, only to encounter difficulty in marketing high volumes of product or services. This was frequently seen following the 2008 economic crisis, when businesses over-estimated the potential market demand and were left with excess capacity.
A challenge of dealing with excess capacity can be seen in transportation. Airlines, for instance, will often schedule empty flights as a precaution against unanticipated market demand. If the plane is empty, a company can still make a profit; however, if there is too much excess capacity in transportation, it may lead to recessionary pressures elsewhere in the economy, as the airline industry struggles to correctly anticipate market demand.
In conclusion, excess capacity is both a positive and negative force within an economy. It is necessary for economic growth and can indicate healthy economic health; however, large amounts of excess capacity can lead to deflationary pressures and hinder economic progress. To maintain balance and healthy economic growth, it is important to monitor the current capacity and compare it to market demand in order to ensure that demand and supply are kept in equilibrium.
For example, when there is a healthy level of excess capacity it indicates that manufacturing industry, businesses, and the service sector are flourishing, and that inventories are low enough to sustain future shipments to customers. In addition, when an economy is experiencing a healthy level of excess capacity it may have potential to grow because businesses have the ability to begin meeting increased demand.
On the other hand, when an economy experiences an excessive level of excess capacity it can lead to low aggregate demand in the economy, stifling economic growth. This can lead to reduced output, fewer investments, and job losses for not just the businesses directly affected but for other businesses as well, resulting in deflationary economic pressures.
Excess capacity can occur for many reasons. Low consumer demand resulting from slow economic growth, technological advancements, or saturation of a product can lead to excess capacity. Excess capacity can also be caused when businesses anticipate increased levels of production, only to encounter difficulty in marketing high volumes of product or services. This was frequently seen following the 2008 economic crisis, when businesses over-estimated the potential market demand and were left with excess capacity.
A challenge of dealing with excess capacity can be seen in transportation. Airlines, for instance, will often schedule empty flights as a precaution against unanticipated market demand. If the plane is empty, a company can still make a profit; however, if there is too much excess capacity in transportation, it may lead to recessionary pressures elsewhere in the economy, as the airline industry struggles to correctly anticipate market demand.
In conclusion, excess capacity is both a positive and negative force within an economy. It is necessary for economic growth and can indicate healthy economic health; however, large amounts of excess capacity can lead to deflationary pressures and hinder economic progress. To maintain balance and healthy economic growth, it is important to monitor the current capacity and compare it to market demand in order to ensure that demand and supply are kept in equilibrium.