Final answer:
The statement that only firms can recognize excess capacity is false, as consumers may observe its effects. Excess capacity happens when a firm's production exceeds market demand, which can lead to visible signs such as excess inventory and discount sales. Firms have access to internal data to measure excess capacity, which can impact decisions on whether to continue operations or close.
Step-by-step explanation:
The statement "Excess capacity will not be visually recognizable to consumers, only to firms" is false. Excess capacity, which occurs when a company is producing at a scale larger than what the market demands, may not be directly visible to consumers but its implications such as inventory pile-up, discount sales, and reduced hours of operation can be noticed by them. In contrast, firms can see it clearly through internal metrics such as plant utilization rates.
In an economic context, especially when discussing economies of scale, a firm may reach a point where increasing production no longer leads to lower average costs. This is what happens beyond point L to V in the hypothetical example. A small or medium plant (S or M) may not stay competitive against a large plant (L) or a very large plant (V), as the latter can produce at a lower cost up to a certain scale (up to L). However, if either L or V continues to increase their scale beyond point L, they will not experience a decrease in average costs of production, potentially leading to excess capacity.
When a firm faces excess capacity, it must make strategic decisions. It might make more sense to close rather than operate inefficiently. This decision is based on whether the cost of producing extra output exceeds the revenues generated from selling it. Hence, recognizing and managing excess capacity is essential for maintaining profitability.