A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing: Advanced Study

I illustrate cost of idle capacity in manufacturing with a simple numerical model of manufacturers and
buyers of cement over a business cycle with off-peak and peak demand periods. Given demand
fluctuations, such as the business cycle, significant cost of idle capacity is ordinary, necessary,
and desirable. My model has two types of plants manufacturing cement, plantK and plantL, each
having linear total costs with absolute capacity limits. PlantK operates with low VC and high FC.
PlantK, because of its low VC, produces continuously at capacity in off-peak and in peak periods.
PlantL, because of its high VC, shut-downs in off-peak periods and produces at capacity in peak
periods. I show results under perfect competition SRMC pricing and LR equilibrium requirement
for all plants E = 0. Only plantL incurs idle capacity costs. This shows a positive aspect
of plantsK that they have no idle capacity costs. PlantsK are modern and make extensive use
of outsourcing. 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.