BUSINESS CYCLES

business cycles,i.e, boom in one period and slump in another,in economic activities, are essentially perpetual features of the economic environment of a country. They influence business decisions tremendously and set the trend for future business.The period of prosperity opens up new and larger opportunities for investment,employment and production ,and thereby promotes business.on the contrary, the period of depression reduces business oppurtunities.a profit maximizing entrepreneur must,therefore,analyse the economic environment of the period relevant for his important business decisions, particularly those pertaining to forward planning.

PHASES OF BUSINESS CYCLES

Business cycles,the periodic booms and slums in economic activities are generally compared to ebb and flow. The ups and downs in the economy are reflected by the fluctustions in aggregate economic magnitudes,including production,investment,employment,prices,wages, bank,credits etc.the upward and downward movements in these magnitudes show different phases of

business cycles.basically,there are only two phases in a cycle,viz, prosperity and depression. However,considering the intermediate stages between prosperity and depression,the various phases of trade cycle may be enumerated as follows: Expansion of economic activities Peak of boom or prospeity Recession, the downtrend, Trough,the bottom of depression, and Recovery and expansion.

The five phases of a business cycle are presented in fig..The steady growth line shows the growth of the economy when there are no business cycles. The various phases of business cycles are shown by line of cycle which moves up and down the steady growth line.The line of cycle moving above the steady growth line marks the beginning of the period of Expansion or Prosperity in the economy. The expansion phase is characterised by increase in output, Employment, Investment aggregate demand, Sales, Profit, Bank credits, Wholesale and Retail price, Per capita output and arise in standard of living. The growth rate eventually slows down and reaches its peak. The peak is generally characterised by slacking in the expansion rate and the end of expansion.

THE PHASES OF THE BUSINESS CYCLE

Expansion Expansion Peak Growth rates Recession Prosperity

Prosperity Trough Line of cycle

Secular growth trend

Time

PROSPERITY: EXPANSION AND PEAK

The prosperity phase is characterized by a rise in the national output, Rise in consumer and capital expenditure, Riese in the prices of raw material and finished goods, And rise in the level of employment.inventories of both input and output increase. Debtors find more and more convienent to pay off debts. Bank advances grow rapidly even though bank rate increases. There is general expansion of credit. Idle funds finds their way to productive investment since stock prices increases due to increase in profitability and dividend.

In the later stages of prosperity, However , Inputs start falling short of their demand. Additional workers are hard to find. Hence additional workers can be obtained by bidding a wage rate higher than the prevailing rates. Labour market becomes a sellers market. A similar situation also appears in other input markets. Consequently, Input prices increases rapidly leading to increase in output and employment.

TURNING- POINT AND RECESSION

Once the economy reaches the peak, increase in demand is halted. The demand start even decreasing in some sectors, for the reason stated above. Producers, on the other hand, unaware of this fact continue to maintain their existing levels of production and investment. As a result, a discrepancy arises between output supply and demand : supply exceeds demand. The growth of this discrepancy between supply and demand is so slow that it goes unnoticed for some time. However, producers suddenly realise that their inventories are piling up.

DEPRESSION AND TROUGH

During the phase of depression , Economic activities slide down their normal level. The growth rate becomes negative. The level of national income and expenditure declines rapidly. Prices of consumer and capital goods decline steadily. Workers lose their jobs. Debtors find it difficult to pay off their debts Demand for bank credit reaches it low ebb and banks experience mounting of their cash balances.

HOW IS PROCESS REVERSED?

The factors that reverse the downswing vary from cycle to cycle like factors responsible for business cycle vary from cycle to cycle. The basic thing is that there is a limit to which an economy can go down. When the economy hits the bottom & stays there for sometime , it marks the end of pessimism & beginning of optimsm . This reverse the process

THE RECOVERY

As the recovery gathers momentum , some firms plan additional investment; some undertake renovation programmers , & some undertake both . these activities generate construction activities in both consumer & capital good sectors. Individuals who had postponed their plans to construct houses undertake this cost now , less cost of construction should mount.

THEORIES OF BUSINESS CYCLES

The pure monetary theory The monetary overinvestment theory The non-monetary overinvestment theory Innovation theory Acceleration principle of trade cycle Psychological theory Under-consumption theories Exogenous forces theories Mitchells theory of cycle Theories of keyensian system Modern theories of trade cycle based on interaction of the multiplier & the accelerator