Money, Banks and Finance in Economic Thought

The Normal Degree of Capacity Utilization: The History of an Ambiguous Concept

Pignalosa Daria, Roma Tre University
Trezzini Attilio, Roma Tre University

In demand-led growth theories, the concept of normal capacity utilisation has played a crucial role, because different theories are characterized by different views of the relationship between the normal degree of utilisation and the degree associated with theoretical positions used for the analysis of growth. Despite its importance, few studies within the demand-led growth approach have directly addressed the issue of the determination of the normal degree of capacity utilisation. However, several analyses, with heterogeneous theoretical frameworks, have dealt with issues related to capacity utilisation while addressing different problems within the theory of production. By reconstructing the history of these analyses, the present paper identifies two main approaches at the issue: the first one considers the determination of the normal degree of utilisation taking into account the different levels of production expected during the lifetime of installed capacity; a second position conceives, instead, the determination of the normal degree of capacity utilisation as the choice of technique that minimizes costs in relation to a single level of output. The analysis seems to suggest that entrepreneurs, as taking their investment decision, choose the size of their productive capacity and plan the degree of utilisation of the same by taking into account that during the life of the plant they will have to produce different levels of output.

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Keywords: capacity utilization; choice of technique; demand-led growth; competition.

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