Economics, 3rd Edition

Productive Capacity 

Most businesses, in the short run, will have a finite capacity – an upper limit to the 

amount that they can produce at any one time determined by the amount of factor inputs they possess. 

How far they are using this capacity depends, in turn, on the state of the economy. In periods of strong 

economic growth, firms may be operating at or near full capacity. If demand is rising for the product they 

produce and prices are rising, it may be difficult for the firm to expand output to meet this new demand 

and so supply may be inelastic.

When the economy is growing slowly or is contracting, some firms may find they have to cut back 

output and may only be operating at 60 per cent of full capacity. In this situation, if demand later increased 

and prices started to rise, it may be much easier for the firm to expand output relatively quickly and so 

supply would be more elastic.