Definition - What does Excess Capacity mean?
Excess Capacity is a situation whereby a manufacturing organization is producing a commodity at a lower output scale than what it can actually produce. This situation can arise when there is less demand of the commodity. Also, in order to increase or decrease the oil prices in the market OPEC countries sometimes produce less oil than their actual capacity thereby creating surplus demand of the commodity. In management terms, we can say that the point at which marginal cost is less than the average cost is excess capacity.
Petropedia explains Excess Capacity
Excess Capacity signifies the demand of the products (that are produced) and the health of an industry. On the other hand it can also be taken as positive for the consumers because it signifies that the firm is not running or will not run out of capacity in the near future. One problem such firm may face is the increasing fixed cost, due to less profit associated with the products. In monopolistic competition or natural monopoly such situation can arise. In case of perfect competition it is impossible to have an excess capacity, but in modern times, excess capacity, can become a part of the firm’s strategy.