Question

1. Explain what it means to say that firms have excess capacity in the long run equilibrium.  Suppose you are talking about a restaurant.  What is the deal and how does it relate to productive efficient.  

Answer 1

Excess capacity is a condition that occurs when demand for a product is less than the amount of product that a business could potentially supply to the market. When a firm is producing at a lower scale of output than it has been designed for, it creates excess capacity.

The term excess capacity is generally used in manufacturing. If you see idle workers at a production plant, it could imply that the facility has excess capacity. However, excess capacity can also apply to the service sector. In the restaurant industry, for example, there are establishments that chronically have empty tables, along with a staff that appears unproductive. This inefficiency indicates that the venue can accommodate more guests, but that the demand for that restaurant is not equal to its capacity.

• Excess capacity exists when the market demand for a product is less than the volume of product that a company could potentially supply.
• The term excess capacity pertains mainly to manufacturing, but it's also used in the services sector.
• Excess capacity can indicate healthy growth, but too much excess capacity can hurt an economy.