Differentiate between capacity output and capacity utilisation.
Ans Capacity utilisation is defined as the ratio of'actual output to some measure of potential output given a firm's short-run stock of capital and perhaps other fixed inputs in the short-run (Nelson, 1989). Capacity utilisation captures the output gap between actual output and capacity output. ") There are four different measures of capacity output (Morrison, 1985; Nelson, 1989). The four measures differ by the manner in which potential or capacity output is defined and whether or not the potential or capacity output is
technologically determined, without an explicit economic foundation, or whether this capacity output represents the outcome of an explicit economic optimisation process, such as cost minimisation or profit maximisation. Capacity output defined by the economic approach can explicitly vary with changes in such economic variables as input prices, quantities of short- run fixed factors or outputs fixed by regulations or other reasons, overtime or added costs, and other factors (Morrison, 1985). The fundamental concept underlying the economic measures is that firms face short-run constraints.
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