Overcapacities financial definition of overcapacities
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overcapacity a situation in which a firm or industry has too much production CAPACITY on hand relative to current demand levels. This may be only temporary because of a downturn in the BUSINESS CYCLE. Alternatively, the decline in demand may be permanent (see PRODUCT LIFE CYCLE) or due to the industry having overinvested in new plant relative to long-run demand potential. In this case, overcapacity, leading to greater competition for limited sales is often removed by the disappearance of inefficient firms from the industry, or by RATIONALIZATION schemes involving the MERGER of firms and closure of redundant plant.