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Status and capacity utilization in small scale industries

The capacity output is a potential output which may be equated to a maximal output or an economically-derived output given the stock of capital and state of technology.

The former concept is a technologically-derived physical measure of capacity and the latter is an economic measure i. Capacity and capacity utilization for conventional industries are strictly short-run concepts.

The two are defined or measured conditional on a fixed stock of capital and state of technology. The two basic notions of capacity discussed in the economic literature may be viewed as the following: Both definitions are based on the notion of a potential or capacity output given the capital stock, other fixed factors, the resource stock, technically-efficient, full-utilization of the variable factors of production e.

What distinguishes the two notions of capacity is how the underlying economic aspects are included to determine the capacity output.

  • Firstly, adequate funds are not available and secondly, entrepreneurs due to weak economic base, have lower credit worthiness;
  • Productivity, efficiency and capacity utilisation utilisation concept 108 measurement of capacity utilization 109 a firm whether it is small or a.

With a purely technologically determined primal measure, capacity is simply the maximum possible output which could be produced using the available technology, capital, and the full and technically efficient utilization of the variable inputs; economic responses by firms are ignored in the physical or primal-based measure.

The economic measure, however, explicitly considers the economically optimum potential output which could be produced given the capital stock, the technology, inputs prices, output prices when outputs are not fixed, and technically efficient and fully-utilized factors of production as appropriate to achieve maximum profit or minimum cost. Appendix II provides additional discussion of capacity and capacity utilization. In the case of fisheries, adopting the traditional economic concepts of capacity and capacity utilization poses several problems.

Foremost among the problems is the need to consider the resource capital i.

Status and capacity utilization in small scale industries

The resource stock is unpriced and represents a type of capital which cannot be aggregated with the vessel capital. Moreover, the resource, regardless of the level of capital and expansion of variable inputs, imposes an upper limit on the total level which may be harvested in this stock-flow production technology. That is, regardless of the expansion of capital and increased utilization of variable inputs, output or catch cannot exceed some level determined by the resource.

Another major problem for measuring capacity and capacity utilization is the possibility of multiple products and multiple quasi-fixed factors. Berndt and Fuss have shown that in the presence of multiple products and multiple fixed factors, capacity and capacity utilization may be indeterminate.

Most fisheries involve multiple-product production and definitely have more than one quasi-fixed factor e.

Status and capacity utilization in small scale industries

The only approach known to allow for the calculation of capacity and capacity utilization in fisheries in which there is more than one output and more than one fixed factor is that of Segerson and Squires Under this approach, the determination of capacity and capacity utilization is conditional upon the resource stock s and requires a single measure of the capital stock. Perhaps of equal importance is that international concerns about capacity and capacity utilization in fisheries appear to be mostly related to capital and effort utilization utilization of vessels and overall total maximum potential catch.

This latter concern, although similar to concerns about capacity and capacity utilization, requires a considerably different emphasis on defining and measuring capacity and capacity utilization in fisheries. The major issues relating to this latter concept is the frontier output, associated input levels, and optimum configuration of a fishing fleet e. The production function or technology describes how service flows from the stocks of economic inputs are used to produce outputs subject to, if any, various technological constraints e.

In general, the production function or technology should depict the maximum possible physical output. In mathematical form, the production function may be specified as follows: Other inputs could be nondiscretionary inputs NDX ; a nondiscretionary input is an input which is beyond the control of the plant or firm manager. In the short-run, capital is usually fixed; that is, plant size and equipment cannot be increased or decreased.

In fisheries, the production process is stock-flow, that is, a bundle of inputs is applied to the resource stock to yield a flow of output or catch. Hence, the resource stock could be added to Equation 1. Firms and industries, however, seldom produce only one product. They frequently produce multiple products. Multiple product production is likely to be the case for most fisheries of the world; many fisheries involve the harvesting of more than one species, and even in the case of single species fisheries, status and capacity utilization in small scale industries than one product form is typically harvested e.

There is thus a multiple product analog of the single product technology; we may express the multiple product analog as follows: If there are technical or economic interactions among all m outputs, production is said to be joint, and Eq.

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If there are absolutely no technical or economic interactions among the m outputs, production is said to be nonjoint in inputs. Alternatively, if changes in the output or price of one product does not affect the production or supply of another product, the technology is nonjoint in inputs. For the nonjoint-in-inputs case, the multiproduct technology consists of separate production functions for each output Yi: There also are several potential modifications to Eq. For example, if Eq. If production is separable between inputs and outputs, there is no unique or specific interaction between any one output and any one input.

If a mathematical function is separable in any of its arguments, composites or aggregates, consisting only of those arguments, may be formed without any loss of information. In addition, the production technology may be specified in terms of a single composite or aggregate output and a single or composite input: Unlike conventional industries, the concept of production in fisheries or the catch-effort relationship is void of conventional measures of inputs e.

This need not be the case and, in fact, has not always been the case. Fishing effort subsequently becomes a surrogate or proxy variable representing all inputs used to catch fish or all inputs used to actually engage in fishing. Resource managers seldom regulate the more traditional economic inputs such as fuel. Historically, fishery managers have probably most often regulated catch or outputs and various characteristics of fishing gear e.

Managers do, however, typically regulate days at sea, crew size but not explicitly the services of labour, and gear and mesh but not the actual capital value.

Status and capacity utilization in small scale industries

There remains considerable uncertainty about how to adequately consider the concept of fishing effort: There are also the associated issues of measurement and standardization. How does one develop measures of fishing effort relative to heterogeneous gear and vessel characteristics which can be compared?

For fisheries, there are two traditional catch-effort relationships. First, there is the short-run catch-effort model in which catch is specified as a multiplicative function of a catchability coefficient qfishing effort E or often referred to as fand resource abundance N: Then there is the surplus production model framework of Schaeffer and Pella and Tomlinson The Schaeffer or what is now referred to as the Gordon -Schaeffer model is as follows: The Pella and Tomlinson model is similar but does not require the symmetry of the Schaeffer model.

If the traditional catch-effort model of equation 5 is related to the traditional economic concept of production presented by equation 1fishing effort or E represents the notion of a composite input or the input function f depicted in equation 1. Moreover, equation 1 is modified to reflect the importance of the resource stock.

The catchability coefficient of equation 5 is a measure of the level of catch corresponding to a one unit level of fishing effort. For an economic specification, q equates to the technical efficiency parameter. This notion of capacity is a technological one, so only technological and resource constraints and input levels determine the maximum potential output, no economic factors. Given the stock-flow production process in fisheries, capacity depends upon the level of the resource stock, where the resource stock abundance also sets an upper bound on capacity.

Capacity may be easily obtained from the frontier output of the production schedule. For example, if we consider the maximum possible output subject to capital being a limiting factor, the maximum or capacity output is depicted in Figure 1 as the maximum output level.

Interpretation of this technologically-derived physical measure, however, does pose some problems. There is a tendency to classify producing firms with primal CU values less than one as having excess capacity or as being overcapitalized.

This is simply not the case. A primal CU value less than one simply means that firms have the potential for greater production, given the capital stock, without having to incur major expenditures for new capital or equipment Klein and Summers, CU cannot exceed one in value for a primal-based measure.

Measuring or assessing the primal-based concepts of capacity and CU for a multiple-product technology is quite difficult. To do so requires the adoption and acceptance of the multiproduct frontier production function and technical efficiency. Unlike the rigorous multiple-product, multiple fixed factor dual economic definition of capacity, the primal-based concepts of capacity and capacity utilization may be defined and measured for a firm or industry producing multiple products and using multiple quasi-fixed factors.

The measurement, however, must be done in a manner similar to that offered by Segerson status and capacity utilization in small scale industries Squires The measurement must be done conditional on the levels of the quasi-fixed factors e. That is, the measures of capacity and capacity utilization are conditional on the available capital stock, the resource stock, other quasi-fixed factors, and any nondiscretionary inputs or outputs.

One of three approaches can be adopted to accommodate the multiple products: The economic-based definition is the output given technically efficient and full utilization of the capital stock, quasi-fixed factors, the resource stock, the state of technology, and all variable factors of production necessary to achieve an economic optimum such as minimum or least cost production or maximum profit.

In contrast, the previously discussed technologically-derived primal definition of capacity equates capacity with the maximum potential output given inputs and the resource stock abundance, including those fixed such as capital in the short run, without any economic optimization.

More formally and following Klein and Friedmanthe capacity output corresponds to the point at which the long-run and short-run average total cost curves are tangent at the minimum level for both short and long-run average total costs Morrison, ; Nelson, The tangency between the short-run and long-run average total cost curves is the point at which a firm should be in long-run competitive equilibrium Figure 2.

This tangency can lie at any point along the long-run average cost curve, not just its minimum. When the firm is in long-run equilibrium with respect to its fixed factors, such as the capital stock, the firm does not face any incentives to invest or disinvest and thereby increase or decrease these fixed factors.

The tangency point at the minimum long-run average total cost is also the point of maximum scale efficiency. Intuitively, this economic notion of capacity means that for a given output level and state of technology, the firm is using the plant size that allows that output to be produced at the lowest average cost. Equivalently, for a given plant size, the firm is producing the output level for which the existing plant was designed. In this case, by reducing its capital stock, the firm can lower its average costs of production.

By increasing its capital stock through investment, the firm again lowers its average costs of production. It is common to associate status and capacity utilization in small scale industries along the long-run average total cost curve with plant expansion in the sense that all fixed inputs are increased. Chambers shows that this is clearly not the case. Movements along the average total cost curve indicate plant expansion activities only when there is a single fixed input.

Thus, and as more formally demonstrated by Berndt and Fussit may not be possible to determine the capacity output or rate of capacity utilization when there are multiple quasi-fixed or fixed factors. The indeterminacy problem is likely to be more severe in the presence of multiple products and multiple quasi-fixed factors. Economic Based Measure [Note: Indeterminancy Problem with Multiple Products And Multiple Fixed Factors] The economic approach, based on cost, profit, or revenue optimization, and a single quasi-fixed input, readily accommodates multiproduct production which is otherwise possible only under fairly stringent conditions with the primal approach Segerson and Squires, The economic approach readily extends from the single-product to the multiple-product case, with a single quasi-fixed input, because the capacity utilization measure uses scalar measures of the shadow price and rental services price of the quasi-fixed input, to give a measure based on the ratio of shadow to total costs or profitso that scalar measures are still involved.

Berndt and Fuss pointed out that these two measures of utilization coincide only if there is but one fixed input capital and if production is characterized by constant returns to scale.

An alternative definition of capital utilization is the ratio of capital services to the stock of capital cf. Schworm, ; Hulten, ; Hulten, ; Lee,