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Inventories Definition

Inventory is a substitute for knowledge. Since you don’t always know just how much inventory you are actually going to need and since inventory costs money, a business enterprise must try to limit how much inventory it has on hand. Those businesses, which have the greatest amount of knowledge and come closest to the optimal size of inventory, will have their profit prospects enhanced. Just as prices in general affect the allocation of resources from one place to another at a given time, so returns on investment affect the allocation of resources from one time period to another. A high rate of return provides incentives for people to save and invest more than they would at a lower rate of return. – A higher rate of return encourages people to consume less in the present so that they may consume more in the future. It allocates resources over time. The present value of an asset is in fact nothing more than its anticipated future returns, added up and discounted for the fact that they are delayed. Conversely, if the city announces that it is going to begin building a sewage treatment plant next year, on a piece of land next to your home, the value of your home will decline immediately, before the adjoining land has been touched. The present value of an asset reflects its futures benefits or detriments, so that anything, which is expected to enhance or reduce those benefits or detriments will immediately affect the price at which the asset can be sold today. It makes sense for a 90 year old man to begin planting fruit trees that will take 20 years before they reach their maturity, because his land will immediately be worth more as a result of those trees. He can sell the land six months later and go live in the Bahamas if he wishes. Part of the value of his wealth today consists of the value of food that has not yet been grown – and which will be eaten by children who have not yet been born.
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