What we mean by capacity constraints???

Question

Explain what a capacity constraint is.

Actually I am doing practice exam questions. Thanks

Answer 1

At the level of a national, or the world, economy it refers to the inflationary pressures that arise when the economy is booming and demand for some scarce resources rises quickly. A freemarket economy will always adjust to changes in supply and demand, but such adjustment takes time. For example, in 1999 the demand for computer-software staff was extremely high relative to the supply because firms believed that they needed to update their systems to prevent them crashing on1 Jan 2000 (the "Y2K" myth). New people can be attracted to learn software skills, but not instantaneously. Prevoiusly trained people can be shifted into software jobs, but not costlessly. Established software staff can be paid to do overtime, again a cost. So in the short run the "elasticity of supply" of software skills is low. As a result there were capacity constraints on delivery by software firms during 1999 -- "lead times" (from order to delivery) lengthened worldwide.

At the level of the individual firm, it means the limits to output without further capital investment. For example, a manufacturer can only make x tonnes of what it makes in (e.g.) 24 hours or 20 weeks physically running the machinery flat out. If the demand is more than that, the only way it can supply is to invest in new production capacity. See the last two or three annual reports of Gooch and Housego if you want to look into a real life example. http://www.goochandhousego.com/infopage.asp?content=Investor_Information

Answer 2

See in
http://faculty.baruch.cuny.edu/peng/JFQA%20final.pdf#search=%22capacity%20constraints%22