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Utilization of optimal capacity in Indian manufacturing, 1974-1996

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  • Abdul Azeez

Abstract

This paper attempts to estimate a consistent series for the economic capacity utilization of the Indian non-electrical machinery manufacturing sector. The economic or optimum capacity is defined as the output where the short-run average total cost is minimized. Using an iterative version of Zellner's seemingly unrelated regression estimation technique, a translog short-run cost function is estimated, imposing the conditions for economic optimizing behaviour of firms to calculate the optimal output. Such a measure assumes that variations in capacity utilization (CU), defined as the ratio of actual to optimal output, are the systematic results of rational optimization procedures, depending on price and cost conditions of firms. A comparison of the new series with the conventional engineering measures of CU shows that the widely used 'installed CU' figures clearly underestimate the true economic utilization levels, mainly due to definitional problems.

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  • Abdul Azeez, 2001. "Utilization of optimal capacity in Indian manufacturing, 1974-1996," Applied Economics Letters, Taylor & Francis Journals, vol. 8(9), pages 623-628.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:9:p:623-628
    DOI: 10.1080/13504850010027572
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    References listed on IDEAS

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    1. Kennedy, James E., 1998. "An Analysis of Time-Series Estimates of Capacity Utilization," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 169-187, January.
    2. Lau, Lawrence J., 1976. "A characterization of the normalized restricted profit function," Journal of Economic Theory, Elsevier, vol. 12(1), pages 131-163, February.
    3. J. M. Cassels, 1937. "Excess Capacity and Monopolistic Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 51(3), pages 426-443.
    4. Berndt, Ernst R. & Hesse, Dieter M., 1986. "Measuring and assessing capacity utilization in the manufacturing sectors of nine oecd countries," European Economic Review, Elsevier, vol. 30(5), pages 961-989, October.
    5. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
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    Cited by:

    1. Frank Asche & Subal C. Kumbhakar & Ragnar Tveterås, 2007. "Testing cost vs. profit function," Applied Economics Letters, Taylor & Francis Journals, vol. 14(10), pages 715-718.
    2. Wu, Wei-Ming, 2009. "An approach for measuring the optimal fleet capacity: Evidence from the container shipping lines in Taiwan," International Journal of Production Economics, Elsevier, vol. 122(1), pages 118-126, November.
    3. Wu, Wei-Ming & Lin, Jenn-Rong, 2015. "Productivity growth, scale economies, ship size economies and technical progress for the container shipping industry in Taiwan," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 73(C), pages 1-16.

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