Installed Capacity (What is it, Design, Calculation and Quantification)

The Installed capacity It is defined as the production potential or maximum production volume that a particular company can achieve during a set period of time. For this, the equipment, the physical plant or facilities and the capital resources they have must be taken into account.

In other words, installed capacity refers to the availability of the infrastructure required to produce certain goods or services. This concept is widely used in economics and public finance, either to describe the activity of an economic sector or of an entire region.

It is a very important aspect in any production system. It should be used as a measure to measure efficiency, that is, to be able to adapt production to existing demand and thus obtain its maximum performance.

Design of installed capacity

When talking about installed capacity, it is necessary to consider the following aspects:

• The costs
• Its use
• Efficiency
• The performance or productivity of its use

These factors help define the magnitude of the infrastructure which is a direct function of the amount of production that can be provided.

The design for installed capacity, it is usually done for a partial and not full use of its potential. For example, in the use of public infrastructure such as airports, stadiums, hospitals, etc. they are designed to be used, generally for a percentage slightly less than 100% of their total capacity.

When the infrastructure or installed capacity is underused, giving it a low use, it brings as Consequently, the service or goods you produce end up being much more expensive per unit produced. If, on the contrary, it has a high level of use, the installed capacity can lead to the saturation of the infrastructure.

In the aforementioned case, you run the risk of not being able to respond in a timely manner to market demand. If this happens, it means that the available infrastructure is being taken over and the need to expand it is born. At a higher level of production, a higher level of capacity is needed.

Calculation of installed capacity

Without any doubt, the infrastructure or installed capacity is influenced by different factors such as technology, labor efficiency and the organization of production and work. This makes installed capacity a dynamic and changing value to the extent that these factors favor it.

Installed capacity is usually measured in units of production in a given period of time. For example, 500 televisions are produced per month. Depending on what is produced, the installed capacity can be calculated based on a single type of product or a mixture of them.

An important aspect to consider is that the installed capacity can also change. If equipment or machinery needs to be repaired or needs maintenance. In this case, the installed capacity during that period of time is reduced.

Installed capacity can also be modified by planning labor in a different way. For example, with even fewer teams, you can create more work shifts and thus maintain production and even increase it. For this, it is very important to study the fixed capital together with the other productive factors in order to obtain the desired level of production.

Quantification of installed capacity

It should be noted that installed capacity is not necessarily always being used at its maximum level and all the time. Here are some ways that can help you quantify your capacity utilization.

• The real or effective time of use of the capital. Admitting that the different sections that are part of an industrial plant behave differently in terms of its use, that effective time is defined as the average time that has been used in each of the sections mentioned.
• Effective use of installed capacity. This is defined as the relationship between the level of product currently achieved and the production capacity of the plant. This use can be measured, in turn, both in technological (potential output) and economic (expected output level) terms.
• The real or effective time and its effectiveness in the use of capital. Variations in the activity of the operation of the different sections of the plant are taken into account. It is measured as the percentage change in the changes in the use of inputs other than capital in a given period of time.
• The relationship between the real time of use and the real capacity of use of the installed capacity. This is an indirect measure of utilization that is given by the quotient between the effective time of use and the effective utilization of the installed capacity.

In summary:

It is important that you bear in mind that the installed capacity depends on the set of capital goods that the industry or company has, which is determined by the limit in the supply at a given moment.

Typically the infrastructure is not fully utilized. There are some goods with more value than others and it depends on supply and demand and the particular economic situation of the sector for whom you produce the goods.

If there is an economic recession, the installed capacity tends to decrease, leaving an idle or unused capacity. The use or not of a productive factor ultimately depends on economic factors and not only technical so it would not make sense to incorporate products with prices higher than those of the market.

Conclution

The use of installed capacity will depend on the quantities of goods or services that are produced. In other words, it depends on the occupation of the infrastructure to generate those products for which it was designed.

It is very important that you remember that the use of fixed capital is, together with other productive factors used in the manufacturing process of goods or services, which allows obtaining a certain level of the product.

There are different ways, direct and indirect, to measure the installed capacity in a company. This capacity can be underutilized both by economic decisions such as, for example, the Expectations of costs and prices that arise as of other factors that result from facts unexpected.

It is also worth noting that although it is true that the underutilization of installed capacity makes production more expensive, it must also be considered that Infrastructure suffers a process of wear and tear and maintenance that generates expenses, and eventually replacement, which is also considered in the costs of the process of production.