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Tutorial Topic: what is business cycle, definition, phases, example, nature of business cycle.
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No era can stay forever. The economy too does not enjoy same periods all the time. Due to its dynamic nature, it moves through various phases.
The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle. Business cycle are also called trade cycle or economic cycle.
What is the Business Cycle?
The Business Cycle, also known as the economic cycle or trade cycle, is the fluctuations in economic activities or rise and fall movement of gross domestic product (GDP) around its long-term growth trend. Business Cycle can also help you make better financial decisions.
The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, the rest of them also change.
Business Cycle Definition
Arthur F. Burns and Wesley C. Mitchel defined business cycle definition as
“Business cycle are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycle vary from more than one year to ten or twelve years; they are not divisible into shorter cycle of similar characteristics with amplitudes approximating their own.”Arthur F. Burns and Wesley C. Mitchel
4 phases of Business Cycle
Each business cycle has 4 phases. They are:
Let us discuss 4 phases of business cycle in detail:
Expansion is the first phase of a business cycle. It is often referred to as the growth phase.
In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. During this phase, the focus of organisations remains on increasing the demand for their products/services in the market.
The expansion phase is characterised by:
- Increase in demand
- Growth in income
- Rise in competition
- Rise in advertising
- Creation of new policies
- Development of brand loyalty
In this phase, debtors are generally in a good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.
In the expansion phase, due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. The expansion phase continues till economic conditions are favourable.
Peak is the next phase after expansion. In this phase, a business reaches at the highest level and the profits are stable. Moreover, organisations make plans for further expansion.
Peak phase is marked by the following features:
- High demand and supply
- High revenue and market share
- Reduced advertising
- Strong brand image
In the peak phase, the economic factors, such as production, profit, sales, and employment, are higher but do not increase further.
An organisation after being at the peak for a period of time begins to decline and enters the phase of contraction. This phase is also known as a recession.
An organisation can be in this phase due to various reasons, such as a change in government policies, rise in the level of competition, unfavourable economic conditions, and labour problems. Due to these problems, the organisation begins to experience a loss of market share.
The important features of the contraction phase are:
- Reduced demand
- Loss in sales and revenue
- Reduced market share
- Increased competition
In Trough phase, an organisation suffers heavy losses and falls at the lowest point. At this stage, both profits and demand reduce. The organisation also loses its competitive position.
The main features of this phase are:
- Lowest income
- Loss of customers
- Adoption of measures for cost-cutting and reduction
- Heavy fall in market share
In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.
After studying the business cycle, it is important to study the nature of business cycle.
Nature of Business Cycle
The nature of business cycle helps the organisation to be prepared for facing uncertainties of the business environment.
Let us discuss the nature of business cycle in detail.
This is the periodic nature of a business cycle. Periodicity signifies the occurrence of business cycle at regular intervals of time. However, periods of intervals are different for different business cycles. There is a general consensus that a normal business cycle can take 7 to 10 years to complete.
The general nature of a business cycle states that any change in an organisation affects all other organisations too in the industry. Thus, general nature regards the business world as a single economic unit.
For example, depression moves from one organisation to the other and spread throughout the industry. The general nature is also known as synchronism.
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