Definition
Capacity refers to the maximum amount of goods or services that a firm, factory, or entire economy can produce with its available equipment, workforce, and technology when operating under normal conditions.
Why It Matters
Capacity helps economists and business leaders understand production limits and efficiency. When production approaches full capacity, shortages, delays, and inflationary pressures may occur. When production is far below capacity, it may indicate unused resources, unemployment, or weak demand.
Example
A factory designed to produce 1,000 cars per month is operating at capacity if it produces all 1,000 cars. If it produces only 700 cars, it is running below capacity, meaning some machines or workers are underutilized.