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Adjustment Costs, Inventories and Output

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Author Info
Leif Danziger

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Abstract

This paper analyzes the optimal adjustment strategy of an inventory-holding firm facing price- and quantity-adjustment costs in an inflationary environment. The model nests both the original menu-cost model that allows production to be costlessly adjusted, and the later model that includes price- and quantity-adjustment costs, but rules out inventory holdings. The firm’s optimal adjustment strategy may involve stockouts. At low inflation rates, output is inversely related to the inflation rate, and the length of time demand is satisfied decreases with the absolute value of the demand elasticity, the storage cost, and the real interest rate.

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Publisher Info
Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1340.

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Length: 23 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:kie:kieliw:1340

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Related research
Keywords: Menu costs; Quantity-adjustment costs; Inventories; Output; Inflation;

Other versions of this item:

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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  27. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September. [Downloadable!] (restricted)
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This page was last updated on 2009-11-24.

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