1. BUSINESS FLUCTUATIONS
• The economic history of the countries of the world, particularly the
capitalist countries, is full of instances of business or economic
fluctuations.
• Almost all the capitalist countries have experienced business
fluctuations at different stages of their economic history
• The economy may go through business upswings and downswings,
booms and busts, prosperity and recession and may even go
through depression
• At times business conditions are prosperous when large number of
jobs are created, factories are found to be working in multiple shifts,
prices are rising and companies are making healthy profits
• At times goods remain unsold for want of adequate demand,
workers are laid off and profits are low
• Such a situation is known as a recession which is sometimes short
and mild
2. Contd……………………
• Thus even within a short span of a decade ( as in the case of India between
1991-2000 ) economies may experience upswings and downswings as in
the case of Indian Economy
• There can be persistent recession culminating in a depression as was the
case of the great economic depression of the 1930’s which engulfed
western Europe and the United States. These fluctuations or upturns and
downturns are known as business cycles
• Business fluctuations are inherent in a capitalist economy and therefore they
are recurring in nature. They influence business decisions and set the
course of business in the future
• The period of prosperity is characterised by new opportunities for
investment, employment and production and business is seen to be smiling
• In contrast, during the period of recession, on account of falling aggregate
demand, there are fewer opportunities of investment and hence growth
rates of employment and output experience a continuous fall
• Entrepreneur ad business managers must therefore analyse the business
conditions and take appropriate decisions in order to maximise profits under
the given circumstances
3. EXPANSION OR PROSPERITY PHASE
• During the expansionary phase ;
(1) Investment or capital expenditure rises leading to rise in employment,
output, incomes and consumer expenditure along with a rise in the
general price level
(2) Inventory level goes up
(3) The rate of interest rises along with rise in investment demand or bank
credit
(4) Borrowers are happy because the real effective rate of interest rates are
low on account of inflation
(5) There is general increase in loanable funds resulting into credit expansion
(6) The profitability of enterprises goes up leading to higher dividend pay-
outs which further rises into rising stock prices
(7) In short, the expansionary phase is characterised by hope and optimism
and the GDP continues to expand via the investment multiplier
4. THE PEAK OF THE BOOM
1. As the expansionary phase advances and approaches the peak
and the economy reaches near full employment levels, the supply
of inputs fall short of their demand leading to rising input prises
2. On account of shortage of labour and particularly skilled labour,
the wage rate increases. There is competitive bidding for skilled
labour. As a result, their wage rates reaches unrealistic levles
leading to cost-push inflation
3. Prices rise more rapidly than the rise in employment and output
4. Wage incomes rise less rapidly than the rise in cost of living
leading to lower standard of living (i.e) falling demand in all the
sectors of the economy and the peak peters out into the down
turn of recession
5. RECESSION OR THE DOWNTURN
1. During the recessionary phase, aggregate supply outstrips aggregate
demand and there is a general fall in prices
2. The supply demand mismatch occurs because at the peak of the cycle, it
is not easy to cut employment and output as fast as the fall in demand
and some producers may maintain peak production levels on account of
lack of awareness about the impending recession
3. During the initial stages of recession, the gap between supply and
demand is less and therefore it is not noticed by less ingenious producers
4. As the recession progresses, inventory levels rises in some industries
only to spread across the industries in later stages
5. Realisation dawns on the producers leading to withdrawal of a part of the
existing investment, cancelling future investment plans, laying off
temporary and causal workers to bring about equilibrium between supply
and demand
6. The cancellation of orders for the inputs has a chain reaction in the input
market for both capital as well as consumer goods
7. As a result, aggregate investments, employment, output, incomes and
demand falls in the entire economy leading to steady fall in the general
price level and profitability of enterprises.
8. This is known as the downturn or the beginning of the recession
6. Contd………………..
ON ACCOUNT OF FALLING AGGREGATGE DEMAND
OR DEMAND RECESSION, THE GENERAL PRICE
LEVEL GRADUALLY FALLS.
THE CONSUMER EXPECT LOWER FUTURE PRICES
AND HENCE THEY POSTPONE THEIR DEMAND.
THEREFORE SUPPLY CONTINUES TO OUTSTRIP
DEMAND AND THE PROCESS OF FALLING PRICES
BECOMES CONTINUOUS.
THE ECONOMY BEGINS TO SHRINK VIA THE REVERSE
MULTIPLIER AND THE RECESSIONARY PHASE CASCADES INTO
DEPRESSION.
7. TROUGH OR BOTTOM OF DEPRESSION
1. During the depressionary phase, the GDP growth rate becomes negative
and the economy begins to shrink
2. There is massive unemployment on account of rapidly falling investment
levels
3. Prices of consumer and capital goods decline continuously
4. Credit off take reaches low levels inspite of ridiculously low rates of
interest
5. On account of mounting losses made by enterprises, stock prices take a
beating leading to an overall crash of the economy
6. At the bottom of the peak of the depression, the economy reaches the
trough and the depressionary cycle comes to an end
7. Once the depressionary phase terminates in its natural course, economic
recovery begins. The economic recovery is charted by the labour market.
8. As there is widespread unemployment, workers are found willing to work
at wages less than the prevailing wage rates
9. Producers begin to expect better profits and gradually investment,
employment, output and income rise. Rising incomes leads to rising
demand and economic revival. Pent-up demand or postponed
consumption gets converted into effective demand. Rising demand
creates hope and optimism with no expectation of a further fall in interest
rates, investment demand picks up and there is general economic revival
8. THE RECOVERY AND EXPANSION
1. Increased investment, employment, output, income and demand
signals the beginning of the recovery phase of business cycle
2. The pace of recovery is accelerated by the investment multiplier
process
3. Existing plant and machinery are put to work once again, fresh
investments are made and the economy gradually moves from
recovery phase into the expansionary phase once again.
4. Prices gradually begins to rise once the recovery phases gives
away to the expansionary phase.
5. Rising prices leads to rising investment, employment, output,
incomes and demand, thus completing the business cycle