What is meant by capacity constraint in economics?

Capacity constraint in economics refers to a restriction on a firm's total supply capacity. This means that there are limits to the amount of goods and services a firm can produce at a given time due to factors such as available resources, labor, technology, and production facilities. When a firm reaches its capacity constraint, it cannot increase production without incurring additional costs or investing in more resources, which could affect its operational efficiency.

Understanding capacity constraints is vital because they can influence pricing, market supply, and overall competition within an industry. When firms are unable to meet higher demand due to these constraints, it can lead to increased prices in the market as customers compete for the limited supply. In essence, recognizing capacity constraints helps explain how firms make operational decisions and respond to changes in market demand.