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CConceptoncept Business cycles are the wave likeBusiness cycles are the wave like
fluctuations in economic activity asfluctuations in economic activity as
reflected in the business economicreflected in the business economicvariables like employment, income,variables like employment, income,output and price level.output and price level.
These fluctuations are cyclic in nature.These fluctuations are cyclic in nature.
The sequence of changes in businessThe sequence of changes in businesscycle recur frequently and in similarcycle recur frequently and in similarpattern.pattern.
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CharacteristicsCharacteristics::
Minor cycle has a duration of 3 to 4 years and major cycleMinor cycle has a duration of 3 to 4 years and major cyclehas a duration of 6 to 12 years.has a duration of 6 to 12 years.
During prosperity business cycle activity is usually aboveDuring prosperity business cycle activity is usually abovethe trend, while during depression it is below the trend.the trend, while during depression it is below the trend.
Prosperity takes twice as much time to develop asProsperity takes twice as much time to develop asdepression.depression.
The phases and sequence is same in all cycles.The phases and sequence is same in all cycles.
If the boom is high the succeeding depression will also beIf the boom is high the succeeding depression will also be
severe, but the reverse is not true.severe, but the reverse is not true.
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PhasesPhases of Business cycle:of Business cycle:
1.1.RecoveryRecovery
2.2.ProsperityProsperity
3.3.RecessionRecession
4.4.DepressionDepression
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Recovery:Recovery:
Revival of demandRevival of demand
Economic activity and general prices startEconomic activity and general prices start
risingrising Production picks upProduction picks up
Rise in employmentRise in employment
Businessmen repay the loansBusinessmen repay the loans Expansion in business activityExpansion in business activity
Banks are liberal in the matter of advancesBanks are liberal in the matter of advances
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Prosperity:Prosperity:
Rapid cumulative movement of prices,Rapid cumulative movement of prices,employment, income and production.employment, income and production.
Total output starts growing at a rapid pace.Total output starts growing at a rapid pace.
There is great incentive for new investment.There is great incentive for new investment.
There is general optimism in business and itThere is general optimism in business and itleads to inflationary rice in prices.leads to inflationary rice in prices.
Retailers and wholesaler buy more than what isRetailers and wholesaler buy more than what isdemanded.demanded.
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RecessionRecession
Industrial output decreasesIndustrial output decreases
Employment starts fallingEmployment starts falling
Bank advances starts fallingBank advances starts falling
Cost of production declines graduallyCost of production declines gradually
Bank reserves suffers setbackBank reserves suffers setback
Investment and profit falls slowlyInvestment and profit falls slowly
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DepressionDepression
General demand for goods and services falls fasterGeneral demand for goods and services falls fasterthan production of goods.than production of goods.
Selling prices falling faster than their cost.Selling prices falling faster than their cost.
Depression is characterized by low prices ,idle fundsDepression is characterized by low prices ,idle fundswith banks , mass unemployment ,and slack trade.with banks , mass unemployment ,and slack trade.
Investment falls rapidly.Investment falls rapidly.
Business psychology is highly pessimistic.Business psychology is highly pessimistic.
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Factors causing swings inFactors causing swings in
business activity:business activity:
Banking operations.Banking operations.
Changes in proportion betweenChanges in proportion betweencapital goods and consumer goods.capital goods and consumer goods.
Purchasing power.Purchasing power.
Profit mania of producer.Profit mania of producer.
Human psychology.Human psychology.
Cyclical changes in weather.Cyclical changes in weather.
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Control measures:Control measures:
1.1. Preventive measuresPreventive measures
2.2. Curative measuresCurative measures
3.3. Government policies:Government policies:
Monetary policyMonetary policy
Fiscal policyFiscal policy
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Preventive measures:Preventive measures:
Equilibrium between demand andEquilibrium between demand andsupply.supply.
Inventories and financialInventories and financialcommitment do not exceed financialcommitment do not exceed financial
resources.resources.
The overhead cost per unit of outputThe overhead cost per unit of outputshould not be allow to go up.should not be allow to go up.
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Curative measures:Curative measures:
Proper monitoring of costProper monitoring of cost
Changes in quality and nature of product.Changes in quality and nature of product.
Changes in selling methods and strategies.Changes in selling methods and strategies. Introduction of new product in depressionIntroduction of new product in depression
phase.phase.
In time of depression firm can utilize a part ofIn time of depression firm can utilize a part ofits retained profits.its retained profits.
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Government policies:Government policies:
Monetary policyMonetary policy::
1.1. Bank rateBank rate
variationsvariations2.2. Open marketOpen market
operations.operations.
3.3. Varying reserveVarying reserveratio.ratio.
Fiscal policyFiscal policy::
1.1. DeliberateDeliberate
changing of taxes.changing of taxes.2.2. Changes inChanges in
governmentgovernment
spending.spending.
