Created 4/8/1998
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Inventories and Equilibrium

J. Bradford DeLong

Click to reduce demand

Changes in aggregate demand produce changes in the level of production and employment because businesses respond to changes in demand by first changing the quantities they produce, and only later changing prices.

A decrease in demand will show up, first, as a rise in inventories; that rise in inventories will then cause sales staffs and retailers to order fewer goods from the factory. Production at the factory will be cut back, and the economy will settle into a low-demand low-production equilibrium at which inventories are once again stable.


Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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