Question

If inventories unexpectedly rise, then production __________ sales and firms will respond by _________ output. a. Trails; expanding. b. Trails; reducing. c. Exceeds; expanding. d. Exceeds; reducing.

Short answer

Option d: Exceeds; reducing.

Step-by-step solution

Analyze Inventory and Production Relationship

When inventories unexpectedly rise, it implies that firms have produced more goods than they have been able to sell. In this scenario, production exceeds sales. Therefore, the first part of the answer is 'exceeds.'

Determine Firms' Response to Excess Inventory

When firms experience a rise in inventory due to production exceeding sales, they typically aim to reduce output. This is because they want to sell the excess inventory before producing more goods. Thus, the second part of the answer is 'reducing.'

Select the Correct Answer

Combine the findings from the previous steps: since production exceeds sales and firms will respond by reducing output, the correct choice is option d: 'Exceeds; reducing.'

Key concepts

Production and Sales Relationship

In economic inventory management, understanding the production and sales relationship is crucial. This relationship describes how much a firm produces compared to how much it sells. When production consistently matches sales, inventory levels remain stable. However, if production exceeds sales, inventories will begin to rise unexpectedly. This growth in inventory indicates that a company has manufactured more goods than it has sold within a given period.
The mismatch between production and sales affects the firm's operational decisions. Companies strive to align production closely with sales forecasts to prevent either surplus or deficit in inventory. This balance helps maintain optimal inventory levels, ensuring they do not unnecessarily tie up capital or incur storage costs.

Firm Output Decisions

Firm output decisions revolve around how much a business decides to produce at any given time. Several key factors influence these decisions, such as sales forecasts, production capacity, and current inventory levels.
When inventory levels rise unexpectedly, it can signal that production has outpaced sales. Companies often respond to this by scaling back production. This reduction helps in aligning future production with expected sales. Reducing output addresses the immediate problem of surplus goods, helping firms to sell off existing inventory before adding new stock.

• Reduces storage and holding costs associated with excessive inventory.
• Aligns product availability with consumer demand.
• Avoids obsolescence and waste due to unused products.

These decisions are not made lightly, as they impact future sales and operational efficiency. Through strategic inventory management and reporting, firms make informed decisions to optimize output.

Inventory Adjustment Strategies

Inventory adjustment strategies are essential for maintaining effective inventory management. These strategies guide firms in correcting imbalances between production and sales. They drive a company's response when inventories either exceed or trail expected levels.
To tackle rising inventories, firms may consider several strategies:

• **Production Curtailment**: Temporarily slowing down or halting production to balance the excess stock.
• **Focused Sales Promotions**: Implementing discounts or special deals to accelerate sales and decrease inventory quickly.
• **Operational Adjustments**: Refining supply chain or production scheduling to better match foreseeable sales.

Adopting these strategies enables firms to efficiently manage their resources, minimize costs, and ensure they match supply with demand. Inventory adjustment is a dynamic aspect of firm management, requiring continuous assessment and adaptability.