How does capacity utilization relate to aggregate supply?

Higher capacity utilization signifies that production resources—such as labor and machinery—are being employed more intensively. When firms operate closer to their maximum output, it typically leads to increased aggregate supply in the economy because resources are being used to their fullest potential. This situation often reflects an economy that is growing and responding to higher demand for goods and services. As capacity utilization increases, businesses may also invest in expanding their productive capabilities or improving efficiency to meet this heightened demand. Therefore, this concept is crucial in linking the utilization of resources to the overall capacity of the economy to produce goods and services, thus illustrating the relationship between capacity utilization and aggregate supply effectively.