Chapter 05: Business Cycle - Bussines Economic - (CA Foundation) Short Notes

Understanding the Business Cycle

A business cycle is the up and down movement of the economy over time. Sometimes the economy is doing well (growth), and sometimes it slows down (recession).

🔁 It Happens Again and Again, Like a Cycle

Just like day and night or summer and winter come one after another, the economy also goes through four main phases:

📈 1. Boom/Expansion (Good Time)

The economy is growing fast. People have jobs, businesses are making money.

Example: UK in the 1920s – Many industries were growing, and people were spending more money.

📉 2. Recession (Slowdown Starts)

Economy starts slowing down. Less jobs, people buy less, companies earn less.

Example: China recently – The economy started slowing down, meaning businesses were not growing like before.

⬇️ 3. Depression (Worst Time)

Very high unemployment. Many businesses close. Prices may fall.

🔄 4. Recovery (Getting Better)

The economy starts improving again. People start getting jobs. Businesses grow slowly again.

🌀 Why is it Called a “Cycle”?

Because it keeps repeating – growth, slowdown, depression, recovery – and then again growth.

Note: These cycles don’t always come at the same time. One cycle might last 3 years, another might last 7 years.

🌍 Almost every country experiences this.

So, in short: A business cycle is like the heartbeat of an economy – sometimes fast (boom), sometimes slow (recession), and it keeps repeating.

📉📈 Business Cycle = Ups and Downs in the Economy Over Time

There are 4 main phases:

1. Expansion (Boom or Growth Phase)

📌 What Happens?

• Economy is growing.
• More people have jobs.
• Businesses are doing well.
• Incomes and profits are increasing.
• People are spending more money.
• Stock market is going up.

Example: India between 2003–2008 – economy was growing fast, lots of jobs, rising salaries, booming businesses.

2. Peak (Top of the Cycle)

📌 What Happens?

• The highest point of growth.
• Everything is at its maximum: production, jobs, prices.
• But now, things start to get too expensive.
• People stop buying too much.
• Growth slows down.

Example: Imagine a balloon filled with too much air — it can't grow anymore or it may burst.

3. Contraction (Recession or Downturn)

📌 What Happens?

• Economy starts to slow down.
• Companies produce more than needed.
• People stop buying.
• Sales fall, profits fall.
• Companies cut costs: stop hiring or even lay off workers.
• Stock prices fall.

Example: In 2020 during the COVID-19 lockdown, many businesses shut down and people lost jobs — that was a contraction.

4. Trough (Lowest Point or Depression)

📌 What Happens?

• Economy hits rock bottom.
• Unemployment is very high.
• Companies close down.
• Very little money in people’s hands.
• Spending and production is at its lowest.

Example: The Great Depression (1929–1933) in the USA – people had no jobs, no food, no money. Businesses collapsed.

🔄 5. Recovery (Start of New Growth)

📌 What Happens?

• Slowly, things start getting better.
• People get jobs.
• Businesses open again.
• Spending increases.
• Confidence returns.
• Economy starts to grow again — back to Expansion.

Example: After COVID-19, when businesses started reopening in 2021–2022, jobs returned, shopping increased — that's recovery.

💡 Important Points:

• These cycles happen in every country.
• They don’t come at fixed times.
• Some may last 2–3 years, others 5–10 years.
• No economy keeps growing forever without ups and downs.

📉📈 Business Cycle Turning Points – Can We Predict Them?

It’s very hard to tell exactly when the economy will go up or down (like predicting weather!). Economists use “indicators” to try to guess what will happen.

🔍 What are Indicators?

Indicators are signs or signals that help tell:

• What is happening in the economy now,
• What might happen soon, or
• What happened before.

There are 3 types of indicators:

✅ 1. Leading Indicators (Come Before)

These change before the economy changes. 🟢 They help to predict the future.

Examples:

• Stock market going up or down 📉📈
• Number of new house building permits 🏠
• Number of new orders in factories 🏭
• Consumer confidence (Are people happy to spend money?)

Example: If people suddenly stop buying houses or companies stop hiring, it could mean a recession is coming, it could mean a recession is coming.

🕒 2. Lagging Indicators (Come After)

These change after the economy has already changed. 🔴 They confirm what already happened.

Examples:

• Unemployment rate (tells us people already lost jobs)
• Interest rates 📉
• Business profits 💼

Example: After a recession has already started, companies report lower profits and more people are unemployed.

📅 3. Coincident Indicators (Happen Now)

These change at the same time as the economy. 🟡 They show what is happening right now.

Examples:

• GDP (total value of goods/services produced)
• Retail sales 🛒
• Personal income 💰
• Industrial production 🏗️

Example: If retail sales are increasing, the economy is currently growing.

📚 Examples of Business Cycles in Real Life

📉 1. Great Depression (1930s)

🌍 The worst economic crisis in history. Started in the USA, spread worldwide. Businesses failed, banks collapsed, and people lost jobs. Global income dropped, prices fell, and it lasted several years.

Cause? Experts disagree, but some say:

• People stopped spending.
• Banking problems.
• Too much debt and low confidence.

🔁 Recovery started in 1933, helped by:

• Government spending during WWII.
• More money available in the economy.

💻 2. Dot-Com Bubble (1997–2000)

Many internet companies (called dot-coms) started growing fast. People invested too much money, thinking all online companies would become huge. Companies spent a lot without making profits. Stock prices shot up, but the companies were weak.

📉 In 2000, the bubble burst: many companies failed, investors lost money.

Note: Don’t believe in hype. Always look at real profits, not just excitement.

🏠 3. Global Economic Crisis (2008–09)

Started in the USA, spread globally. People were buying too many houses with loans, even if they couldn’t afford. Banks gave easy loans = Housing prices went up fast. But when too many houses were built, prices fell = People couldn’t repay loans. Banks suffered huge losses, and this affected the whole economy.

📉 People lost jobs, businesses shut down — a big recession happened.

🌐 Features of Business Cycles

🔁 (a) They Come Again and Again (Periodic), But Not Regular

Business cycles keep repeating — growth, peak, fall, recovery — but not on a fixed schedule. Some last 2 years, others 10 years. Some are mild, others are very intense.

Example: Like the weather — summer, winter, monsoon come every year, but start and end at different times and are not always the same in strength.

🧱 (b) They Have 4 Phases: Expansion → Peak → Contraction → Trough

These 4 stages don’t always look neat or equal. Sometimes expansion lasts long, sometimes contraction is faster.

Example: During the 2008 crisis, contraction happened fast. But recovery took many years.

🏭 (c) Mostly Happen in Free Market Economies & Spread to Other Sectors

Begin in one part (like real estate or banking) but spread to other areas like jobs, trade, etc.

Example: In 2008, US banks failed → then real estate → then auto industry → then global impact.

🛠️ (d) Some Industries Suffer More

Capital goods (like machines) and durable consumer goods (like cars, fridges) are hit harder. Agriculture is affected less (especially in countries like India where people still need food).

Example: In a recession, people stop buying cars but still buy rice and vegetables.

🌀 (e) Business Cycles Are Complicated

They are caused by many different things like:

• War 🪖
• Technology changes 💻
• Consumer confidence 🛍️
• Government policies 💸

That’s why they’re hard to predict.

Example: Nobody expected COVID-19 to crash the global economy — but it did!

📉 (f) They Affect Many Economic Things at Once

Business cycles affect:

• Jobs (employment/unemployment)
• Production
• Prices
• Trade
• Interest rates
• Spending & investment

Example: When the economy falls, people lose jobs, prices drop, companies stop investing.

🌍 (g) They Spread to Other Countries (Contagious)

If one country falls into a crisis, it can affect many others — especially those connected through trade.

Example: The Great Depression of 1930s started in the US and spread to Europe and Asia.

🚨 (h) They Affect the Whole Society

When business cycles hit badly, people lose jobs, businesses shut down, poverty increases. They hurt people’s income, savings, and daily life.

Example: In the 2008 financial crisis, millions lost their homes and jobs — big impact on people’s well-being.

🌐 What Causes Business Cycles?

Business cycles (i.e., the ups and downs in the economy) can happen because of two main reasons:

1. Internal (within the economy)
2. External (outside the economy)

🔄 1. Internal Causes (Inside the Economy)

These are changes that happen within the country’s economy.

🛍️ A. Fluctuations in Demand (Keynes)

If people are buying more, businesses grow → economy booms. If people stop buying, businesses slow down → economy shrinks.

Example: During a festival season like Diwali, people spend more = growth. During a crisis like COVID-19, people spend less = slowdown.

🏗️ B. Fluctuations in Investment

When companies expect high profits, they invest more = more jobs, income, growth. When companies fear losses, they invest less = slowdown.

Example: If interest rates are low, a company may build a new factory (good time). But if they fear losses, they delay investment (bad time).

💰 C. Government Spending

More government spending = boosts economy. Less government spending or high taxes = slows economy.

Example: Government builds highways → creates jobs → growth. If government stops spending → fewer jobs → slowdown.

📉 D. Money Supply (How Much Money is Available)

If money is easily available, people borrow and spend more → boom. If money is tight, people stop spending → recession.

Example: Banks give cheap loans = people buy homes, cars. If banks raise interest rates, fewer people take loans = slowdown.

😕 E. Psychological Factors (Mood of Businesses)

If business owners are optimistic → they invest = economy grows. If they are scared → they stop investing = economy slows.

Example: If investors feel confident after a good budget, stock markets rise. If there’s political fear or war, investors panic → markets fall.

⚙️ F. Technology & Innovation (Schumpeter)

New inventions create demand, jobs, investment = boom. But over time, overproduction or outdated tech = slowdown.

Example: The invention of smartphones created a huge boom in telecom. But when the market got full, growth slowed down.

🌍 2. External Causes (From Outside)

These are outside events that affect the economy.

🪖 A. Wars

During wars, resources go to weapons → other production falls = recession. After wars, countries rebuild = boom.

Example: World War II hurt economies at first, but rebuilding later created growth.

🏗️ B. Post-War Reconstruction

After war ends, rebuilding roads, homes, etc. creates jobs and demand = growth.

📱 C. Technology Shocks

A sudden new technology boosts production and demand.

Example: Mobile phones led to a boom in electronics, manufacturing, and services.

🌧️ D. Natural Disasters / Weather

Floods or drought = poor farm output = low farmer income = less demand for other goods.

Example: If crops fail in Punjab, farmers buy fewer tractors or clothes = industries suffer.

👨‍👩‍👧‍👦 E. Population Growth

If population grows faster than jobs or income = more poverty = less demand = slowdown.

🔁 F. Global Linkages (Trade)

If one country faces a crisis, others are affected too.

Example: 2008 financial crisis started in the USA but hit countries like India too.

🏛️ G. Policy Changes & Consumer Taste

New laws, taxes, or consumer preferences can impact demand.

Example: Ban on plastic = hurt plastic industry. Sudden shift to electric vehicles = petrol vehicle sales drop.

📊 What is the Relevance of Business Cycles in Business Decisions?

Business cycles (the ups and downs of the economy) affect every business — small or big. If a business understands the stage of the cycle, it can make better decisions about when to:

• Invest 💼
• Hire staff 👷‍♂️
• Launch new products 📱
• Expand or reduce production 🏭
• Change pricing, marketing, or strategy 🎯

🔄 Why Business Cycles Matter for Decision-Making

✅ 1. Each Phase Affects Business Differently

In a boom (good time), people spend more → businesses grow. In a recession (bad time), people save money → businesses suffer.

Example: A restaurant chain might open new branches during a boom. But during a slowdown, it may shut down unprofitable outlets.

✅ 2. Better Planning = Better Profits

Understanding where the economy is going helps businesses:

• Plan production
• Set budgets
• Adjust prices
• Control costs

Example: If a clothing brand sees a slowdown coming, it can reduce stock, delay new designs, and avoid losses.

✅ 3. Cyclical vs Non-Cyclical Businesses

Cyclical businesses (very affected by economy):

Ex: Fashion, electronics, real estate, cars, tourism

👉 Do well during booms, suffer in recessions.

Non-cyclical businesses (less affected):

Ex: Food, healthcare, education

👉 Stable demand in all times.

Example: A car company may lose sales in a recession. But a grocery store keeps selling even during tough times.

✅ 4. Right Time to Launch Products or Start a Business

Launching a new product or business in a recession can be risky. It’s smarter to launch during a recovery or boom, when people are spending more.

Example: A travel agency may wait for the economy to improve before offering luxury international tours.

✅ 5. Adapting During Downturns Is Key

Businesses must:

• Cut costs 💸
• Offer discounts/smaller packs
• Change marketing strategy 📣

Example: A restaurant chain may offer more combo meals or discounts during a recession to attract budget-conscious customers.

✅ 6. Not All Are Affected Equally

Some businesses actually grow during a recession:

• Discount stores
• Fast food chains
• Budget airlines

Example: During a downturn, people may stop eating at luxury restaurants but go more often to affordable fast-food joints.

💡 Summary Table (Simple):

Phase	Business Impact	Smart Decision
Boom	High sales, growth	Expand, invest, hire
Recession	Low sales, losses	Cut costs, offer discounts
Recovery	Slow growth, improving	Plan new products, cautious growth

🚀 Final Thought

Just like a weather forecast helps you decide if you need an umbrella 🌧️, knowing the business cycle helps a business decide if it should grow or be cautious. Even if forecasts aren't 100% perfect, they help businesses stay alert, reduce risk, and make smarter decisions.