|Business cycle, term used by economists to designate a periodic increase and decrease in an economy’s production and employment. Ever since the Industrial Revolution of the 1800s, the overall level of production in industrialized capitalist countries has varied from high output and employment to low output and employment. Economists study business cycles because they have a significant impact on all aspects of an economy.|
i) Changes in capital expenditures
ii) Innovation and imitation
iii) Credit and loan policies
iv) External shocks
v) Political business cycles
The evil effects of cyclical fluctuations of business firms
- Business cycles, however, land individual business firms into a number of disabilities and difficulties. Even during revival and the beginning of expansion phase, certain ill effects start appearing. The increase in raw materials price, in labor costs and routs, and the higher rates charged for credits accommodation increase the costs of carrying on business when the situation becomes more difficult, the evil of cancellation develops.
- The businessman that his customers are refusing to take goods, which they have ordered, and that there is a decline in the volume of orders.
- During the later stages of expansion, business enterprises are conformed by much more severe competition. Prices are maintained with difficulty.
- The decline in prices, which is characteristics of the period of recession, usually finds merchants and manufacturers with large inventories, which depreciate materially in value at this time. These excessive inventories are usually made up of finished goods rather than raw materials.
- The individual businessman usually suffers through being compelled to sell his goods at a loss in order to meet his obligations. This may result in either at least a sacrifice of profits, or possibly necessitating the carrying on of business at an actual loss.
- During contraction, one of the most important reasons for financial loss during such a period is found in the continuation of fixed charges of all sorts. It is possible during contraction for an individual concern to reduce its direct costs by the discharges of labor and the reduction of purchases of raw materials, but most of the elements of overhead cost cannot be so reduced.