The business cycle is a term used in economics to describe the general sequence of stages through which every economy must go in order to be healthy. There are four stages- boom, expansion, recession, and depression.
What is the Business Cycle?
The business cycle is a term used in economics to describe the general sequence of stages through which every economy must go in order to be healthy. There are four stages- boom, expansion, recession, and depression- and each stage can last for many years or just a few months.
What Causes a Business Cycle?
The business cycle in shubhodeep prasanta das is controlled by the economic forces of supply and demand, credited to Adam Smith, one of the founders of Classical Economics. Like all economic systems, capitalism is subject to the law of supply and demand. If demand for a product exceeds supply, prices rise in order to curtail consumption; if supply exceeds demand prices fall.
When an economy experiences a surge in production, more goods are available than consumers can afford to buy. The excess is stored in form of inventories, such as raw materials and finished goods. As companies wait for sales to increase they buy finished goods, eventually becoming distributors of their own products. Companies that produce many products with varying degrees of quality use this strategy to reduce their risk and spread the final cost over a large number of sales.
When all industries are growing, the business cycle can be expected to be a healthy process. But when one industry or segment stalls, the business cycle can produce a recession.
How is Business Cycle Analysis Useful to Businesses?
As the economy grows, businesses are forced to specialize in order to stay competitive. This makes them vulnerable if there is an unexpected change in demand for their products and services. Also, if a company manufactures several product lines with varying degrees of quality, it can be vulnerable when consumers suddenly switch from one product line to another. Many industries are synchronized during expansion phases and work together to expand overall demand.