Business Cycle

Changes in Business Activity

© 2012, TESCCC Economics Unit 7, Lesson 2

Learning Targets

1. Describe phases of business cycle2. Identify and explain the factors that

cause business cycles3. Analyze how economists use

business cycle theory to predict what is going to happen

4. Analyze how the government uses predictions to make public policy

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Business Cycle TheoryA free market economy does not grow at a constant rate. It goes through a series of expansions and contractions. These fluctuations are called business cycles. Business cycles are a pattern to the general level of economic activity or the level of production of goods and services (GDP). Since this is a pattern it keeps repeating itself.You can see the business cycle activity from 1914 to 1992 below in the graph.

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Business Cycle Theory Four Phases of business

cycle are: –Expansion–Peak

–Contraction-recession–Trough

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Contraction or Recession

For a contraction to be a true recession, you must see 2 consecutive quarters or six months of declining real GDP.

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Business Cycle Theory

Trough

Peak

Expansion

Stages

Recession

Expansion Phase

1. GDP2. Durable goods3. Factory order4. Raw materials orders5. Unemployment6. Consumer confidence 7. problem -inflation

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Contraction or Recession

1. Demand2. GDP3. Durable goods4. Factory orders5. Unemployment6.Consumer confidence 7. problem- unemployment.

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Causes• There are several things that may

lead to fluctuations in the economy. Some are within the economy and we call them internal factors. Some are outside the economy and we call them external factors.

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Internal factors (within the economic system)

1. Business Investment

In an expanding economy firms invest in new capital goods. This investment spending creates new jobs and growth. If firms decide to halt investment, this slows the economy down and can cause unemployment.

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2. Interest Rates and Credit

When interest rates go up, consumers will not make big ticket purchases. Lower demand slows down economy.

When interest rates go down we see more purchases being made – causing growth.

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3. Consumer Expectations

Fears of the economy slowing down can cause consumers to stop spending. This will then actually slow down the economy.

If consumers feel confident about the economy, they spend more. Spending more can cause growth.

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External factors (outside the economic system)

External Shocks

These are factors outside the economic system, but they can cause fluctuations in business activities. Examples include: wars natural disasters foreign economies 9/11

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