Capacity utilization measures how much of a company's potential output is being used. It is expressed as a percentage, calculated by dividing actual production by maximum possible production. A higher percentage indicates that a company is efficiently using its resources, while a lower percentage may suggest underutilization or inefficiencies. This metric is important for businesses and economists because it helps assess economic performance. For example, if a factory has a capacity utilization of 80%, it means it is operating at 80% of its maximum output. Understanding capacity utilization can guide decisions on investments, production levels, and workforce management.