The economic order quantity model aims to reduce which two types of costs specifically?

The economic order quantity (EOQ) model is designed to minimize the total costs associated with inventory management. Specifically, it focuses on balancing two critical types of costs: setup costs and holding costs.

Setup costs refer to the expenses incurred each time an order is placed or replenished. These can include costs related to processing orders, shipping, and receiving goods. By ordering in optimal quantities, businesses can reduce the frequency of orders and, thus, the associated setup costs.

Holding costs, on the other hand, pertain to the expenses of storing inventory over time. This includes warehousing fees, insurance, depreciation, and any potential obsolescence or spoilage of goods. The EOQ model helps determine the most economical quantity to order that minimizes these holding costs by not overstocking inventory.

By minimizing both setup and holding costs, the EOQ model ensures that a company can operate more efficiently, lowering overall inventory costs while maintaining sufficient stock levels to meet demand. This balance is crucial for effective supply chain and operations management, making the selected answer the most applicable to the purpose of the EOQ model.