Capacity Constraints Definition

The term capacity constraints refers to the limits on the amount of output that a firm can produce. The main types of capacity constraints are:

1) Physical limitations: These include the availability of land, raw materials, and labour.

2) Technical limitations: This relates to the technology used in production and whether it is able to meet demand.

3) Managerial limitations: This encompasses the managerial skills and decision-making ability of those running the business.

4) Financial limitations: This includes the availability of finance to invest in new plant and machinery or to pay for additional raw materials.

5) Market demand: If there is insufficient demand for a firm’s products then this can act as a constraint on output.