Definition of Capacity Utilisation
Capacity utilisation expresses output as a % of total potential output. For example, if a car factory could produce 1,000 cars a week and output was 740, then capacity utilisation would be 74%
Capacity utilisation is important for determining the elasticity of supply. If firms are near 100% of capacity utilisation then supply will be very inelastic, at least in the short term.
In the long term firms can increase productive capacity and increase the amount of capital.
Capacity utilisation formula. In practise firms will not want to produce at 100% utilisation as this allows no scope for fluctuations. They will prefer to target a certain % say 85% of capacity utilisation. If the % varies significantly from this amount then firms will either try to expand capacity or deal with oversupply.