Inflation and EOQ
Inflation affects the EOQ model in two major ways. First, while the EOQ model can be modified to assume constant price increases, many times major price increases occur only once or twice a year and are announced ahead of time. If this is the case, the EOQ model may lose its applicability and may be replaced with anticipatory buying – that is buying in anticipation of a price increase in order to secure the goods at a lower cost. Of course, as with most decisions, there are trade off associated with anticipatory buying. The costs are the added carrying costs associated with the inventory that you would not normally be holding. The benefits of course, come from buying the inventory at a lower price. The second way inflation affects the EOQ model is through increased carrying costs. As inflation pushes interest rates up, the cost of carrying inventory increases. In the EOQ model this means that C increases, which results in a decline in the optimal economic order quantity.
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