Final answer:
Denominator-level capacity concepts include theoretical capacity, emphasizing maximum plant output, and practical capacity, taking into account market demand and operational efficiencies.
Step-by-step explanation:
In assessing plant capacity and market demand, two denominator-level capacity concepts play a central role. First, the theoretical capacity focuses on the maximum possible output a plant can supply, assuming full efficiency and no downtime. This is more about the plant's capabilities and production processes. It answers the question regarding how a firm should produce its products and what level of labor should be employed to achieve this maximum output.
Secondly, the practical capacity addresses the output customers demand for products produced by a plant. This concept takes into account not just the production capabilities, but also market factors such as market power, product differentiation, and barriers to entry. It's the amount of production output that can be achieved taking into consideration market demand and operational inefficiencies such as equipment maintenance and labor breaks. Hence, the firm's decisions on what products to produce, at what price, and the amount of output are heavily dictated by practical capacity.