A business cycle is the natural rise and fall of economic growth over a period of time. The cycle is a useful tool for analysing the wider economy, as the upward and downward fluctuations show variations in production, employment, wages, and investment. Understanding the cycle allows you as a business owner to make better financial decisions with the goal of helping your business increase profit despite the downturns. Today we discuss the five main phases of a business cycle: expansion, peak, recession, trough, and recovery.
During this phase, there is a steady increase in economic activity. This encompasses production, employment, output, wages, profits, demand and supply of products and sales. The cycle continues until there’s a 100% utilisation of available resources, and the production level reaches maximum capacity. Unemployment rates will be zero, except for voluntary unemployment or structural employment, which may be temporary. Additionally, this boom will allow the public to enjoy higher standards of living, and will eventually decline as the economy approaches the peak phase.
When there is growth, the economy will inevitably reach its peak. During this stage, the maximum growth is attained and economic indicators don’t grow any further. Demand in the market will stagnate, and this will signify the completion of the expansion phase.
Because demand is stagnant during the peak of an economy, demand will eventually begin to fall in certain sections. In the recession phase, investment and employment levels decrease along with the demand. During this phase, prices tend to fall and economic indicators like income and wages decline. And once producers become aware of this phase in the economy, they start scaling back operations, and start disinvesting. Due to these drawbacks, producers of raw materials will also hold off on their investments and prices of goods fall as well.
The demand and supply of goods and services and their prices reach their lowest levels during the trough or depression phase. In this phase, there’s a negative growth rate in the economy. Businesses will have difficulty disposing of their stock, and that’s why they typically resort to reducing their prices.
The recovery phase is the turnaround from the bottom and the economy starts recovering from the negative growth rate. This is where demand and supply pick up, and where investment and employment start to increase their pace, finally leading to a new cycle.
The Bottom Line
The business cycle represents what an economy goes through and all businesses and economies go through this cycle. Though each phase can be defined, the timing spent on each cycle is random and unpredictable.
One of the reasons why learning about the business cycle is important, is because it has a significant influence on consumer demand. Higher levels of unemployment may lead to consumers having less money to spend on products and services which tend to lower consumer demand. This lowered demand may lead to lower sales, which may shrink your profits and worse, force you out of the market.
Let Bartercard Help!
Overcoming these economic downturns can be a big challenge. But remember, downturns typically result in a culling of weak businesses. Thriving and surviving the sluggish business phases will entail cutting costs, relying on saved resources during periods of prosperity, and increasing your efficiency as a business.
As a business, you need to find new and innovative ways to expand your business and be able to survive even the most challenging phases in a business cycle. With Bartercard, you can increase profit by turning your excess stock, downtime, spare capacity, or vacant seats, and turn them into additional profit. By joining Bartercard, you can use trade dollars to barter with tens of thousands of members worldwide and grow your business. To learn more, book a free 15-minute consultation today!