Spare capacity
Definition. Spare capacity exists when a firm or an economy is producing below the maximum output that its current resources could sustainably supply, leaving some factors of production underused. At the level of the whole economy it corresponds to a negative output gap and idle labour and capital.
With spare capacity, supply tends to be more price elastic because output can be expanded quickly without a sharp rise in unit costs. Demand side expansion then raises output with little upward pressure on prices.
This term belongs to Price Elasticity of Demand and Supply in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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