The Basic Theory of Quantity Adjustment

In this chapter, we will describe the basic framework and some key concepts of the economic theory of quantity adjustment. Section 3.1 characterizes the capitalist system as a demand-constrained economy in which firms are almost always competing to capture the demand for their products. This aspect of capitalism has a profound relevance with the long-term changes in technologies and products through incessant innovations. Section 3.2 formulates production rules for stockout avoidance behaviors by individual firms facing uncertain demand under sales competition. Here “stockout avoidance” means that firms seek to suppress their expected stockout occurrence ratio to a considerably low level by holding a certain amount of inventory. Section 3.3 outlines quantity adjustment in the capitalist economy as a dynamic process generated by the interactions of firms each of which follows production and ordering rules for stockout avoidance. An emphasis will be given to roles of inventories as buffer and information sustaining the loose stationarity of the economy. Section 3.4 provides a historical overview of preceding contributions to the analysis of quantity adjustment. After the appearance of General Theory by Keynes, the development in this field has been attained mainly through attempts to build dynamic and multi-sector models of the multiplier process and to clarify factors affecting the stability of this process.