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Capacity shortage

Where there are not enough resources eg premises, plant, machinery, equipment, and labour to produce the output required to meet the level of demand. If this occurs within an industry as a whole (which may be the case in growth markets), firms (suppliers) may raise prices to cash in on the extra demand. In the long run a firm may seek to increase its capacity eg through larger premises, machinery and / or investment in human resources. If it does so, it must be certain there will be sufficient surplus demand within the industry for it to be able to achieve the extra sales required to cover its costs. The potential rewards in terms of sales and profit / return on investment tend to attract new entrants / suppliers, although some businesses might be put off where the barriers to entry are high eg legislation, start-up costs, degree of control existing producers / providers have over supplies and distribution. See barriers to entry. Obviously, the higher the perceived barriers of entry and lower the perceived reward, the less likely new competitors will enter a market.

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