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Objectives1. To examine the four phases of the business

cycle. 2. To relate the business cycle to current trends

in the market, analyzing specific companies. 3. To demonstrate clear knowledge of the

growth phase and comparing companies which are in this category, those on the rise and those declining.

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The Juglar Cycle• Was invented by the French physician and

statistician Clemente Juglar• First identified cyclical patterns within the

economy• Recognizes the business cycle occurring

every eight to 11 years• Is often referred to as “The Business Cycle”

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The Business Cycle• Explains the fluctuations in economic

activities• Represents the patterns of expansion and

contraction in the economy over long periods of time

• Divides into four parts:– growth– peak– recession– trough 4

The Business Cycle

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Time

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Growth• May also be called expansion or recovery• Occurs when persistent increases in the key

measurements of aggregate economic activities are present

• Accounts for the increase in productivity among companies toward full production

• Causes a rise in price before full employment and production is attained

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Aggregate: the sum or whole amount of somethingProductivity: measurement of physical output for each unit of input used, usually referring to labor hours

Aggregate Economic Activities

• Are measured in terms of:– employment– income– sales– productivity

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Growth• Can be viewed as a “virtuous cycle”

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Sales Increase

Production Increases

Employment Increases

Income Increases

Causes of Growth• Include the following:

– business is newly formed– more branches of the business are opened– need for the product rises or is created– introduction of new or improved product

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The Peak• Accounts for the time when business activity has

reached a maximum, including:– full employment– level of output at or near capacity

• Often causes higher prices• Acts as a transition point from growth to recession

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Causes for the Peak• Include the following:

– boom in the economy– sudden need or want of the product– availability of product rises– the product is unique for the time being

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Recession• May also be referred to as contraction• Follows the peak• Is commonly defined as two consecutive

quarterly declines in GDP• Accounts for a decline in:

– total output– income– employment– trade

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Gross Domestic Product

• Accounts for the total market value of all goods and services produced within the borders of a country during a specific time period

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Recession• Occurs in all companies• Rarely causes price level to fall

– unless severe and prolonged, as in a depression

• Differs from depression – depression occurs when GDP drops by

more than 10% while a recession experiences a less severe drop

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Causes of Recession• Include the following:

– product falls behind in usefulness, technology or want

– value of the dollar declines– customer debt

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The Trough• Marks the lowest levels during a

recession• Accounts for the least amount of output

and employment• May be short or long lived• Ends the period of recession and begins

growth

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Causes of the Trough• Include the following:

– the product is severely outdated– need or want for the product is at an all time

low– the product has not changed over time– many customers already possess the

product

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Business Cycle Indicators

• Are used to foresee changes in the economy of a country

• Help predict peaks and troughs within business cycles• Account for reports comprised of statistical data which

are studied by economists• Should not be trusted to always accurately predict

changes in the economy

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Business Cycle Indicators

• Include the following factors:– labor force– wages, labor costs and productivity– exports and imports– national defense– personal incomes and consumer attitudes– output, production and capacity utilization

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America Online® (AOL®) Sample

• Is an online service provider• Gained popularity in the mid to late

1990’s• Portrays a company which has

experienced the business cycle

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AOL® Growth• Began in the mid 1990’s • Occurred for the following reasons:

– marketed as being usable for people unfamiliar with computers

– fee was changed from an hourly rate to monthly payment of $19.99 in 1996

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The AOL Peak• Occurred around 2000 when the company

was valued at slightly over $200 billion• Resulted from the following:

– flat monthly fee rather than hourly rate– providing the user friendliest Internet service

provider– advertisements allowing for customers to

become familiar with AOL® and its workings, such as “You’ve Got Mail®”

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The AOL® Recession• Started shortly after its peak• Occurred due to the following:

– competition from cheaper Internet service providers

– the introduction of broadband high speed Internet– AOL® running slowly due to high volumes of

users

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The AOL® Trough• Has not yet occurred• Is trying to be avoided as AOL® has

completed the following:– merged with Time Warner®, a large and

profitable multimedia company• revenue still falls after this historically expensive

merge

– offered high speed Internet– recruited new employees to offer fresh ideas

concerning the renewal of the company 24

Review• The business cycle explains the

fluctuations in economic activities• The four parts of the business cycle are

growth, peak, recession and trough• Business cycle indicators are used to

foresee changes in the economy, and include factors such as labor force, wages, exports and imports, national defense and output

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