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On the Economic Interpretation and Measurement of Optimal Capacity Utilization with Anticipatory Expectations

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  • 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1536.

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Date of creation: Jan 1985
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Publication status: published as Morrison, Catherine J. "On the Economic Interpretation and Measurement of Optimal Capacity Utilization with Anticipatory Expectations," Review of Economic Studies, Vol. 52, pp. 295-310. April 1985
Handle: RePEc:nbr:nberwo:1536

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Cited by:
  1. Guyomard, Herve & Vermersch, Dominique, 1989. "Derivation of Long-run Factor Demands from Short-run Responses," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 3(3), October.
  2. Matthew Andersen & Julian Alston & Philip Pardey, 2012. "Capital use intensity and productivity biases," Journal of Productivity Analysis, Springer, vol. 37(1), pages 59-71, February.
  3. Catherine J. Morrison, 1990. "Market Power, Economic Profitability and Productivity Growth Measurement: An Integrated Structural Approach," NBER Working Papers 3355, National Bureau of Economic Research, Inc.
  4. Alston, Julian M. & Andersen, Matthew A. & Pardey, Philip G., 2006. "Asset Utilization and Bias in Measures of U.S. Agricultural Productivity," 2006 Annual meeting, July 23-26, Long Beach, CA 21220, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Berndt, Ernst R. & Fuss, Melvyn A., 1989. "Economic capacity utilization and productivity measurement for multiproduct firms with multiple quasi-fixed inputs," Working papers 3001-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Zvi Griliches, 1991. "Hedonic Price Indexes and the Measurement of Capital and Productivity: Some Historical Reflections," NBER Chapters, in: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, pages 185-206 National Bureau of Economic Research, Inc.
  7. Marini, Giovanni & Pannone, Andrea, 2007. "Capital and capacity utilization revisited: A theory for ICT-assisted production systems," Structural Change and Economic Dynamics, Elsevier, vol. 18(2), pages 231-248, June.
  8. Georganta, Zoe, 1997. "The effect of a free market price mechanism on total factor productivity: The case of the agricultural crop industry in Greece," International Journal of Production Economics, Elsevier, vol. 52(1-2), pages 55-71, October.
  9. H. Kim, 1999. "Economic Capacity Utilization and its Determinants: Theory and Evidence," Review of Industrial Organization, Springer, vol. 15(4), pages 321-339, December.
  10. James Kirkley & Catherine Morrison Paul & Dale Squires, 2002. "Capacity and Capacity Utilization in Common-pool Resource Industries," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 71-97, June.
  11. Catherine J. Morrison, 1985. "Productivity Measurement with Nonstatic Expectations and Varying Capacity Utilization: An Integrated Approach," NBER Working Papers 1561, National Bureau of Economic Research, Inc.
  12. Supawat Rungsuriyawiboon, 2004. "An Analysis of Cost Structures in the Electricity Generation Industry," CEPA Working Papers Series WP052004, School of Economics, University of Queensland, Australia.
  13. Llorca, Manuel & Orea, Luis & Pollitt, Michael, 2013. "Efficiency and Environmental Factors in the US Electricity Transmission Industry," Cambridge Working Papers in Economics 1318, Faculty of Economics, University of Cambridge.
  14. Felthoven, Ronald G., 2000. "Measuring Fishing Capacity: An Application To In North Pacific Groundfish Fisheries," 2000 Annual meeting, July 30-August 2, Tampa, FL 21815, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  15. Sanghamitra Das, 1990. "A Micro Econometric Model of Capital Utilization and Retirement," NBER Working Papers 3568, National Bureau of Economic Research, Inc.
  16. Prucha, Ingmar R. & Nadiri, M. Ishaq, 1996. "Endogenous capital utilization and productivity measurement in dynamic factor demand models Theory and an application to the U.S. electrical machinery industry," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 343-379.
  17. Sarbapriya, Ray & Mihir, Kumar Pal, 2011. "An Application of Economic Capacity Utilization to the Measurement of Total Factor Productivity Growth: Empirical Evidence from Indian Fertilizer Industry," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 125-142, March.
  18. Lee, Jong-Kun, 1995. "Comparative performance of short-run capacity utilization measures," Economics Letters, Elsevier, vol. 48(3-4), pages 293-300, June.
  19. Michalis Nikiforos, 2012. "On the Utilization Controversy: A Theoretical and Empirical Discussion of the Kaleckian Model of Growth and Distribution," Economics Working Paper Archive wp_739, Levy Economics Institute.

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