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Business Cycles

This document discusses business cycles and their key phases and theories. It begins by defining business cycles as fluctuations in aggregate economic activity, alternating between periods of prosperity and depression. The four phases of a business cycle are then outlined as the prosperity, recessionary, depressionary, and recovery phases. Several theories of business cycles are also summarized, including the innovation theory, under-consumption theory, psychological theory, and Hicks' theory. The document concludes by discussing advertising strategies firms can employ during different phases of the business cycle.

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352 views

Business Cycles

This document discusses business cycles and their key phases and theories. It begins by defining business cycles as fluctuations in aggregate economic activity, alternating between periods of prosperity and depression. The four phases of a business cycle are then outlined as the prosperity, recessionary, depressionary, and recovery phases. Several theories of business cycles are also summarized, including the innovation theory, under-consumption theory, psychological theory, and Hicks' theory. The document concludes by discussing advertising strategies firms can employ during different phases of the business cycle.

Uploaded by

manu192
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS CYCLES

Presented By:
Priya Singh- 62 Milind Bhoir- 73 Pankaj Mankame- 79 Ashwathi Baburaj- 98 Harshad Vichare- 101

Introduction
Mitchell defined a trade cycle as a fluctuation in aggregate economic activity. According to Haberler the business cycle in the general sense may be defined as an alternation of periods of prosperity and depression, of good and bad trade.

Features of a Business Cycle


A trade cycle is a wave-like movement. Cyclical functions are recurrent in nature. Expansion and contraction in a trade cycle are cumulative in effect. A trade cycle is characterized by the presence of a crisis, i.e. the peak and trough are not symmetrical, that is to say, the downward movement is more sudden and violent than the change from downward to upward. Though cycles differ in timing and amplitude, they have a common pattern of phases which are sequential in nature.

Phases of a Trade Cycle


A trade cycle is commonly divided into four well defined and inter-related recurring phases: Prosperity phase- expansion or the upswing Recessionary phase- a turn from prosperity to depression. Depressionary phase- contraction or downswing. Revival or recovery phase- the turn from depression to prosperity.

Prosperity Phase
In the expansionary phase of the business cycle, following events occur: Income level tends to rise Unemployment rate declines Actual level exceeds the potential output level Investment increases Interest rate rise Share price index tends to rise Money supply increases There is a risk of over-heating of the economy.

Recessionary Phase
Recession relates to a turning point rather than a phase. The banking system and the people in general try to attain greater liquidity. Income throughout the economy falls.

Depressionary Phase
Shrinkage in the volume of output, trade and transaction. Rise in the level of unemployment Price deflation Fall in the structure of interest rates Contraction of bank credit

Recovery Phase
Lower turning point at which an economy undergoes change from depression to prosperity. Level of employment output and income slowly and steadily improves Stock markets become more sensitive.

Important Business Cycle Theories


Innovation theory Under-Consumption Theory Psychological theory Hicks theory

The Innovation Theory


The innovation theory of a business cycle is propounded by J.A Schumpeter Innovation does not arise spontaneously, it must be actively promoted by a agency in the economic system The term Innovation should not be confused with inventions.

When there are internal changes taking place on account of innovation, The development process begins. Schumpeter classifies innovation into five categories Introduction of new type of goods Introduction of new methods of production Opening of new markets Discovering of new sources of raw material Change in the organization of an industry

Under-Consumption Theory
Existing unequal distribution of wealth in the community. Relativity, inequality of income in the community increases.

The Psychological Theory


According to pingou, the psychological errors of optimism and pessimism give rise to trend of business fluctuations in a pervasive manner.

Hicks Theory of Trade Cycles


In the Hicksian model, the following concepts plays an important role The warranted rate of growth Induced and Autonomous investment The multiplier and the accelerator

General Conclusion on the Theories of Trade Cycle


Trade cycles being complex phenomenon are caused and conditioned by various factors and it is not easy to attribute to any single factor. Every cycle in the economic history of a country is to be analyzed individually.

Advertising Budget Product Policy and Business Cycles- A managerial Insight


During recessionary situation, the firms need to increase advertising expenditure for inducing the buyers to spend more on articles of comforts and luxuries that have high income elasticity of demand. During property period the firms need to increase advertising expenditure on those goods which have high advertising elasticity, so that sales increase and business profits multiply. The firm can launch value-for-money brands product during slump period.

Thank You

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