Question

Catalog companies are committed to selling at the prices printed in their catalogs. If a catalog company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or as expected? If the company could change the price of sweaters, would it raise the price, lower the price, or keep the price the same? Given that the company cannot change the price of sweaters, however, consider the number of sweaters it orders each month from the company that manufactures the sweaters. If inventories become very high, will the catalog company increase orders, decrease orders, or keep orders the same? Given what the catalog company does with its orders, what is likely to happen to employment and output at the sweater manufacturer?

Short answer

• The demand for sweaters has decreased.

• It was unexpectedly low.

• The company should lower the price.

• The company will decrease orders.

• The employment and output level will reduce at the sweater manufacturer.

Step-by-step solution

Meaning of inventory

Inventory is the stock of goods produced by the firms to supply them in the market. Firms speculate about the demanded quantity of their product in the market and produce that much of it and stock them at a place until it gets sold.

Demand and effect on inventory level

If the quantity demand for goods in the market exceeds the inventory level, it implies that the firm speculated less number of goods than the actual demand. If the inventory level exceeds the quantity demand for goods in the market, it implies that the firm speculated more than the actual demand.If the quantity demand for goods in the market and inventory level is equal, it implies that the firm speculated the right quantity of demand for its goods.

• Since the inventory level is rising, it implies that fewer sweaters are being sold. It concludes that the actual demand for sweaters is declining.

• The rising level of inventory also shows that the demand for sweaters was unexpectedly low.

• According to the law of demand, an increase in the price of a product decreases the quantity demanded by people and vice-versa. Applying the law of demand, the company should decrease the price of sweaters to increase the demand for them. This will adjust to the declining demand for sweaters.

• Since the company is facing an increasing inventory level, it will reduce the orders from manufacturers. The company will do so to maintain the stock of inventory according to the decreased demand.

• Since the company will decrease the number of orders from the sweater manufacturer, the manufacturer will decrease the quantity produced. At the lower output, the manufacturer will require fewer workers, so it will fire some of its workers. Hence, the output and employment level will fall.