Unit – 5 : Business Cycles
1) The term Business cycle refers to economy-wide fluctuations in production or economic activity over several months or years.
2) Business Cycle is also known as Economic Cycle.
3) Business Cycle simply means the whole course of business activity which passes through the phases of prosperity and depression.
4) A business Cycle is not a regular, predictable, or repetitive phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable.
5) Characteristics of a Business Cycle:
i. A business cycle is synchronic ii. A business cycle show a wave like movement
iii. Cyclical fluctuations are recurring in nature
iv. There can be no indefinite depression or eternal boom period
v. Business cycles are pervasive in their effects. vi. The up and down movements are not symmetrical
6) Phases of Business Cycle:
Boom Recession Depression Recovery
- During the Boom phase production capacity is fully utilized and also products fetch an above normal price which gives higher profit.
- In Boom period, consumption will be decreased as prices are going up.
- The Demand is more or less stagnant or it even decreases.
- A downward tendency in demand is observed. The supply exceeds demand
- Desire for liquidity increases all around.
- Producers are compelled to reduce price so that they can find money to meet their obligations.
- This Phase of the business cycle is known as the Crisis.
- Underemployment of both men and materials is a characteristic of this phase. General Demand falls faster than production
- Volume of Production will be reduced.
- The demand for the bank credit is at its lowest which results in idle funds.
- The interest rates are decline regime.
- Depression phase done not continue indefinitely.
- Wages will be paid low.
- Prices are at the lowest, the consumers, who postponed their consumption expecting a still further fall in price, now start consuming.
- As demand increases, the stocks of goods become insufficient.