91Ó°ÊÓ

Inventories are the stock of final goods that are not sold and the capital goods and raw materials that help produce final goods. Firms hold inventories to match the sudden upsurge in market demand.

Although maintaining inventories is beneficial for all firms, how many inventories to keep is a crucial decision. Only an adequate amount of inventories can help firms to maximize their profits.

An unexpected boom in inventories means high production. However, the inventories cannot affect the demand. Thus, the sale remains the same. As a result, production exceeds the sales. To balance the gap between demand and supply, the firms wait for the inventories to exhaust. Therefore, they reduce production/output for some time.