Final answer:
When total production exceeds total expenditures, there will typically be an increase in inventories, as goods are not being purchased as quickly as they are produced. Firms may slow down production rather than increase it, to prevent additional inventory buildup. Over time, they might consider other strategies, such as promotions or price adjustments, to align production with demand.
Step-by-step explanation:
If total production is greater than total expenditures, typically, there will be an increase in inventories. This situation implies that the goods produced by firms are exceeding the amount being purchased by consumers. This can happen for a variety of reasons such as overestimation of demand or a sudden drop in consumer spending.
In response, firms may indeed adjust their production levels; however, it is unlikely they will choose to further increase production. Instead, firms may stop or slow down production to avoid further inventory buildup and costs associated with excess inventory.
It's important to think about what motivates firms: profits, which are the difference between revenues and costs. If the costs of production decrease due to technological improvements or other factors, a firm's profits go up, and they are more motivated to produce since they earn more profit per unit. However, if the inventory is already high, adding more to it by increasing production will not be a favorable outcome.
While there could be an increase in saving due to the excess goods and potentially reduced spending by consumers, this is a secondary effect and not an immediate market response. Similarly, if firms respond by increasing prices instead of managing inventory, they risk reducing demand further, which is not desirable.
Therefore, the most straightforward reaction would be an increase in inventories. In the longer term, firms will likely adjust production and potentially consider other strategies such as sales promotions or price adjustments to bring inventories back in line with demand.