What are the motives for holding inventories?

Firms hold inventories primarily for three key motives:

1. Transaction Motive

   • Ensures uninterrupted production and sales by maintaining adequate stock levels.
   • Prevents stockouts that could disrupt operations or lose customers.

2. Precautionary Motive

   • Acts as a safety buffer against unexpected demand spikes or supply disruptions.
   • Reduces risks of production halts or lost sales due to unforeseen events.

3. Speculative Motive

   • Allows firms to capitalize on anticipated price changes (e.g., buying raw materials when prices are low).
   • Enables bulk purchasing to secure discounts or leverage favorable market conditions.