Economic Order Quantity (EOQ) – Concept, Types, Benefits & Importance

Since the beginning of the civilization, trade and commerce flourished the most. The magnitude was so much that business took various new spectrum, nowadays so many things can make up a business. However, the act itself has changed, but the idea of business and the strategy is what the days of yesterday got only fine tuned as per the given condition. The study of business and how it affects the market and how it is related to inflation is called economics. Money is a medium for humans’ sell their commodities and services which is based on the one broad things call economics. Check Importance and Benefits of Economic order quantity below.

Concept of Economics

Economics is a discipline which is considered as social study related to the production, and distribution, and consumption of goods and services that the people of a nation is directly or indirectly related to. It also deals with how government and public sector make choices on allocation of resources to meet the need and want and desire, also how the population should work on to achieve maximum output. Often the economic analysis progresses through the deductive procedure, where the specific human activities are solely considered.

Understanding Economics:

economic-order-quantity

If you wish to delve into the concept of economics, it is needed to know the very first economic thinkers from the 8th century BC were from Greek farmers who planned to sustainable farming to fight scarcity of agriculture. However, the first book published on economics was about many years back in the year 1776 by a Scottish Philosopher Adam Smith.  Economics is broadly a subject dealing with the trajectory of society based on demand and necessity.

Types of Economics

Broadly economics is divided into two broad classifications Macro Economics and Microeconomics. Microeconomics broadly deals with how an individual consumer produces and make their decisions. Which includes household to government. Microeconomics deals with how these individuals trade and how the price is affected by the supply and the demand. Macroeconomics, on the other hand, is the study of the overall economy. It can include the business affairs of a state, or a country or continent or even the whole world.

These particular field deals with the study of Gross Domestic Product and the business cycle. However, the study deals with the model of the economy and how it affects society and the Gross Domestic Product. However, a more significant part of economics is based on the law of Demand and Supply.

This law explains the theory of that correlates the seller of resource with the buyer of the support. The theory describes how the philosophy of law and supply are intuitively interrelated with each other. This can be explained with an example. While studying economics, it will clear that every country’s infrastructure her agriculture. Irrespective of what is harvested for eating to cultivating cotton for clothes, everything something or the other as raw material.

Now with that, raw material which needs to be improved. Now considering a county that economically strong but food can never sacrifice so taking account of two items that is the cultivation of grains and hiring artisans for stained glass. Well! It can be undoubted said that in that given county having a stained-glass window is a luxury. So always the demand for grains will be the highest, and to meet the supply the cultivations have to more and thus investing in one such business is one such profitable venture.

Economic Order and Quantity

 While studying economics, it is very much suggested to know about Order and quantity. It is the study regarding the amount of the company should purchase its inventory. This is done so that the inventory related to business costs gets reduced. The economic order quantity also includes ordering, such as storage costs and ordering costs.

Benefits of Economic Order Quantity

It is suggested to study the economic order quantity if you are wan to consider the business from a financial standpoint. The aim of Economic Order quality to detect the optimal number of products. That is through economic order quantity is often modified to determine the production level and the order interval of the company. Economic Order is an essential cash flow which can minimize the cost of inventory. The Economic Order Quantity can be used to calculate the inventory order of the business. This is done by detecting the reorder point, as the company always avoids running out of orders.

Importance of Economic Order Quantity

For a business, it is not always beneficial to hold inventory, so through economic order quantity, it is possible to minimize the cost of ordering. Often the cost of ordering an inventory fall due to over increasing of ordering volume, this happens due to economic purchasing scale. However, the formula of Economic order quantity works in a way by calculating the minimized total cost of the, which is done by setting first order diminish to zero. The cost of holding inventory make up the component of the formula. However, there are few critical notations of the method those are as follows

Annual Quantity Demand:

  • Unit cost (Which can be variable)
  • Carrying cost
  • Unit cost
  • Ordering cost
  • Volume per Order

The principal purpose of the Economic order quantity is to minimize the sum of ordering and holding. Economic order quantity is both practiced by merchandising companies and manufacturing companies. The manufacturing companies do it to find out the optimal order size or the raw materials while selling companies do it to find out the order size ready to be used as merchandise inventory.  However, there is a close relationship between the ordering and holding a cost.

As the advanced civilization legends gave ideas to proceeds, likewise economists around the world incorporated various laws to determine the nature of a small-scale business to the world bank. These theories changed the way people thought; new strategies were lined to meet the demand and keep up the over growing demand of the commodities. Economics is yet another subject that is based on theory and assumptions. However, some assumptions are hard to consider just as assumptions, like Economic order quantity, which has been practiced over the years for the company’s benefits.

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