On the Measurement of Capacity Utilization

Capacity utilization is usually defined as the ratio of actual output to the output corresponding to (1) the minimum point on the short-run average total cost curve, and (2) the point of tangency between the long-run average total cost and short-run average total cost curves. In practice, however, capacity utilization is often measured as the ratio of actual to the maximum potential output consistent with a given capital stock. This paper demonstrates how to estimate the theoretical measures of capacity utilization, and examines the correlation between three measures of capacity utilization, and the McGraw-Hill estimates of capacity utilization, using data from a sample of U.S. privately-owned electric utilities for 1961-83.