TITLE:
A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing
AUTHORS:
Gerald Aranoff
KEYWORDS:
Production, Cost, Capacity, Business Cycle, Output-Rate Flexibility
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.9,
December
9,
2014
ABSTRACT: We present an elaborate numerical example
of a competitive manufacturing industry in the United States facing demand
fluctuations to illustrate cost of idle capacity in manufacturing. We show that
given demand fluctuations, such as the business cycle, significant cost of idle
capacity is not only ordinary and necessary but desirable! We recommend
manufacturing firms in the United States increase outsourcing major parts and
components to increase output-rates flexibility. Outsourcing is rising in
recent years with advances in internet, computers, and telephone. Manufacturers
today can depend on getting needed parts “just-in-time” from outside suppliers
without maintaining inventories of parts or capacity to produce parts.