Excess Capacity: For excess capacity and limit pricing to be effective requires that a firm be willing to give up profits to forestall entry. This may or may not be reasonable, but let's consider the ideas first.; In order to understand "excess capacity" it is important to understand what me mean by "capacity." When a production facility is designed, it is planned for some expected level of output. It only makes sense to design the facility so that it is most efficient at the planned level of output. This means that production facilities are designed to operate at the minimum of the Average Total Cost curve; this is "capacity." Keep in mind that this is different from how you might have thought the term "capacity" is used. After all, the capacity of a container is the maximum amount it can hold; however, a firm can produce well beyond its designed "capacity" (though if it does so, costs are rising).