Economic Capacity Utilization and its Determinants: Theory and Evidence

Economic Capacity Utilization and its Determinants: Theory and Evidence This paper develops and estimates a model of economic capacity utilization and its determinants by allowing for the firm's full optimization behavior that considers endogenous output choice. The model consists of deriving the short-run output supply function and the capital demand function which generate optimal and capacity output. Optimal capacity utilization is determined as the ratio of optimal to capacity output and its determinants are identified. Evidence from U.S. manufacturing shows that capital expansion not accompanied by market growth and higher materials and capital prices has contributed to lower capacity utilization. Energy price increases have exerted a stimulating impact on capacity utilization. Conventional capacity utilization measures are found to be biased and fail to capture the influences of changes in economic conditions facing firms. Review of Industrial Organization Springer Journals

Economic Capacity Utilization and its Determinants: Theory and Evidence

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Kluwer Academic Publishers
Copyright © 1999 by Kluwer Academic Publishers
Economics; Industrial Organization; Microeconomics
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