Abstract

The primal and dual measures of capacity utilization under certain conditions, such as the nature of the economy of scale, have been widely used to analyze the current state of the economy in explaining the labor productivity and the inflation rate. However, the characteristics of certain measures are the ad hoc, since they are not based on explicit theoretical foundations. Nevertheless, many approaches have used the economic theory of cost and production by defining production capacity as the level of the output where the short and long run average total cost curves are tangent. Under the condition of constant returns to scale in the long run, productive capacity corresponds to the output that minimizes the short-run average total cost curve. To explain the shift of the aggregate production to industrial production, a dynamic duality theory has prompted researchers to revise the concept of the short-run production capacity, conditioned by a quasi-fixed stock of capital.

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