Economics of Spare Capacity

In this video we look at the meaning and measurement of spare capacity in and evaluate topics where the spare capacity available is important.

What do we mean by spare capacity?

Spare capacity occurs when a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply (SRAS) is elastic, and the output gap is negative.

What are our main measures of spare capacity?

1. The unemployment rate (measured as a % of the labour force)
2. The estimated output gap for an economy (actual versus potential GDP)
3. Surveys of business capacity utilisation in industries such as construction