Working Paper: NBER ID: w1536
Authors: Catherine J. Morrison
Abstract: This study builds on recent research giving the notion of capacity utilization clearer economic foundations. In this research optimal output Y* is defined as the minimum point on the firm's short-run average total cost curve, and capacity utilization is then computed as CU=Y/Y*, where Y is actual output. Here I extend these concepts to include adjustment costs due to changes in the stock of capital, and nonstatic expectations of future output demand and input prices. The more general notion of CU is shown to depend on the shadow values of the firm's quasifixed inputs, and is decomposed to isolate the effects of anticipatory expectations. An empirical comparison is then made between traditional indices and alternative economic CU measures, using annual U.S. manufacturing data 1954-80. The calculated indices exhibit plausible patterns, which can be interpreted as the effects of nonstatic expectations and adjustment costs.
Keywords: capacity utilization; economic optimization; anticipatory expectations; investment behavior
JEL Codes: D24; E22; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipatory expectations (D84) | Investment behavior (G11) |
| Investment behavior (G11) | Capacity utilization (CU) (L97) |
| Anticipatory expectations (D84) | Capacity utilization (CU) (L97) |
| Adjustments in capital stock (D25) | Capacity utilization (CU) (L97) |
| Expected future demand (J23) | Adjustments in capital stock (D25) |