The term ‘inventories’ refers to stocks held by the firm. These may be of raw materials, intermediate goods or final goods. Usually inventories are treated either as a residual which arises when output does not equal sales or as a minor aspect of the production process. However, we shall see that the decision to hold inventories may be of prime importance to the firm and in certain situations the level of inventories may be the firm’s best source of information and strategic variable.
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