Capacity is the amount a company or an economy can produce using its current equipment, workers, capital and other resources at full tilt. Judging how close an economy is to operating at full capacity is an important ingredient of monetary policy , for if there is not enough spare capacity to absorb an increase in demand , prices are likely to rise instead.
When there is too much spare capacity, however, the result can be deflation, as firms and employees cut their prices and wage demands to compete for whatever demand there may be.