Final answer:
Firms operating below full capacity often require more new external funds for expansion when sales increase compared to those at full capacity, especially during economic expansions. In sluggish economies, firms may still invest heavily in anticipation of future profits. The external funding aids in capital growth, allowing firms to increase their output and meet consumer demand.
Step-by-step explanation:
The question relates to how firms finance their growth, particularly when an increase in sales requires firms to acquire further external funds to purchase new equipment or expand facilities. Firms operating at less than full capacity may need proportionally more new funds when sales increase compared to firms operating at full capacity, because they have more room to grow and may need to make significant investments to reach their full potential. During times of economic expansion, firms invest in business growth to meet increasing consumer demand and enhance profits. It's important to note that even in a sluggish economy, firms may continue to invest heavily, as was the case in 2009 where U.S. firms invested $1.4 trillion.
In contrast, firms already at 100% capacity may have already made many of the necessary capital investments and thus could scale production with less need for significant external financing. Moreover, as profits and consumer demand rise, firms are motivated to increase output. The expansion often results in higher capital outlays, as firms seek to optimize production, which can result in a supply curve shift to the right, indicating an increase in the quantity supplied at any given price.