Inventory and the Theory of the Firm

A serious criticism of the inventory models presented in the literature is that they often seek to minimize inventory costs rather than to minimize total costs for a specified production level. This neglect is caused, in large measure, by a failure to consider inventories as factors of production, with substitution possibilities between other types of inputs. This paper incorporates these substitution possibilities into the analysis, and formulates an inventory model within the theory of the firm.