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Adjustment Costs, Inventories and Output

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  • Danziger, Leif

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.

Suggested Citation

  • Danziger, Leif, 2007. "Adjustment Costs, Inventories and Output," Kiel Working Papers 1340, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1340
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    Cited by:

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    3. Niels Framroze Møller, 2019. "Decoding unemployment persistence: an econometric framework for identifying and comparing the sources of persistence with an application to UK macrodata," Empirical Economics, Springer, vol. 56(5), pages 1489-1514, May.

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    More about this item

    Keywords

    Menu costs; Quantity-adjustment costs; Inventories; Output; Inflation;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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