Business Studies | Creating a Business

The business cycle

All countries suffer fluctuations in the level of activity within their economies. At times spending, output and employment all rise; during other periods the opposite is true. A nation’s gross domestic product measures the value of a countries output over a period of time. This figure is dependant upon the levels of economic activity. Rising economic activity will cause a higher level of GDP.

The business cycle describes the regular fluctuations in economic activity and GDP occurring over time.

Trade cycles generally have four stages:

1)      Recovery or upswing

2)      Boom

3)      Recession

4)      Slump

Boom

A boom follows with high levels of production and expenditure by firms, consumers and the government. Booms lead to prosperity and confidence in the business community. Investment in fixed assets is likely to increase. However, sectors of the economy experience pressure during booms. Skilled workers may become scarce and firms may offer higher wages. Simultaneously, as the economy approaches maximum production, shortages and bottlenecks occur as insufficient raw materials and components exist to meet demand. Prices rise. The combination of rising wages and rising prices of the raw materials and components creates inflation.  Inflation usually leads to the end of a boom.

Recession

In a recession incomes and output start to fall. Rising prices of labour and materials increase costs of production. This eats into businesses’ profits. In circumstances such as this, the UK government has raised internet rates to avoid inflation. Falling profits and rising interest rates are likely to lead to delays in implementing plans to invest in new factories and offices. The level of production in the economy may stagnate or even fall and the amount of spare capacity rises. Some businesses fail and the level of bankruptcies is also likely to rise.

Slump

 A slump often, but not always, follows a recession. In some circumstances an economy may enter the upswing stage of the business cycle without moving through a slump period. Governments may take action to encourage this by for example, increasing their own spending or lowering interest rates. A slump sees production at its lowest, unemployment is high and increasing numbers of firms suffer insolvency (limited companies become insolvent, whilst the term bankruptcy applies to individuals, sole traders and partnerships).

Demand and the business cycle

Producers and retailers of basic foodstuffs, public transport and water services may notice little change in demand for their products  as the trade cycle moves through its various stages. This is because these are essential items which consumers continue to purchase even when their incomes are falling – demand for them is not sensitive to changes in income.

Demand for other products is more sensitive to changes in income levels and the stages of the business cycle. Examples include foreign holidays, electrical products, such as televisions and CD players, and construction materials, such as bricks.

Firms selling basic foodstuffs might have to take little or no action to survive a recession. Demand for their products might increase as consumers switch from more expensive alternatives. At the other extreme, businesses supplying materials to the construction industry could be hard hit as firms delay or abandon plans to extend factories and build new offices.  Their position might be made worse by a fall in demand for new houses as hard-up consumers abandon schemes to move home.