When there is unexpected rise in the sales _______ .
Correct Answer :
There will be unplanned decumulation of inventories.
Solution :
The correct option is: There will be unplanned decumulation of inventories.
Let us understand the economic concepts behind this step-by-step:
1. Meaning of Inventories:
In economics, inventories refer to the stock of unsold finished goods, semi-finished goods, and raw materials that a firm keeps to ensure smooth business operations. Firms plan a certain level of inventory based on their expected sales.
2. Planned vs. Unplanned Inventory Changes:
If actual sales match expected sales, the change in inventories matches the firm's plans. However, when actual sales differ from expected sales, it leads to unplanned changes in inventory levels.
3. Impact of an Unexpected Rise in Sales:
When there is an unexpected rise in sales, consumers buy more goods than the firm anticipated. Because production schedules cannot be altered instantly, the firm must meet this sudden increase in demand by selling goods out of its existing stock of inventories.
4. Decumulation of Inventories:
Drawing down from existing stock causes the inventory levels to fall below what the firm had planned. This reduction in the stock of inventories is called "decumulation." Since this decrease was not anticipated or planned by the firm, it is specifically referred to as an unplanned decumulation of inventories.
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