Utilization of Productive Capacity and Profit Margins in the Main Industrial Sectors in Italy

Abstract

In this paper we examine the process of cost formation and the evolution of profits in some leading sectors of the Italian industry. The analytic scheme is based on a model of short run behavior in which the quantity of fixed capital cannot be adjusted and equilibrium between total unit costs and prices is not always achieved. In the proposed interpretative scheme, the existence of quasi-fixed factors constitutes a constraint for the firm in its ability to choose variable factor inputs. The optimal level of capacity utilization is determined at the point where total costs and total revenues are equal. Extra profits therefore arise because the level of production is not optimal. Should the level of production reach its optimal level, extra profits would disappear. Moreover, given the level of production, the variation of factor and product prices leads to a modification of unit profits. In this paper we examine the effect of changes in interest rates on the capacity utilization of existing plants and therefore on unit profits.