BUSINESS CYCLE

Meaning

Business cycle is a part capitalist system. It refers to the phenomenon of cyclical

booms and depressions. In a business there are wave like fluctuations in aggregate
employment, income output and price level .The term business cycle has been
defined in different ways by different economists . Professor Haberler¶s definition is
very simple when he says ³The business cycle in general sense may be defined as
an alteration of periods of prosperity and depression of good and bad trade .´

Keynes definition is more explicit: ³A trade cycle is composed of periods of good

trade characterised by rising prices and low unemployment percentages, altering
with periods of bad trade characterised by falling prices and high unemployment
percentages´

Professor Gordon¶s definition is precise. ³Business cycle consists of recurring

alteration of expansion and contraction in aggregate economic activity, the
alternating movements is in each direction being self reinforcing and pervading
virtually, all parts of economy´

The most acceptable definition is given by Professor Mitchell in these words:

³Business cycles are a type of fluctuations found in an aggregate economic activity
of nations that organise their work ma inly in business enterprises.´

An important feature of business cycles is that no business cycle is perfectly regular

with uniform frequency and amplitude that is, time taken to move from one peak level
of output to the next would always be the same, and the level of output and
employment would always vary in same proportions between the upper and lower
turning points.

xYPES OF BUSINESS CYCLES

1. Kitchin cycle is a short business cycle of about 40 months discovered in the

1920s by Joseph Kitchin.
2. The Long Jagler Cycle: This cycle is also known as major cycle. It is
defined as fluctuation of business activity between successive crises .The
duration of this cycle on an average is nine and a half years.
3. The Very Long Kondratieff Cycle:‘ In 1925 , N.D. Kondratieff came a
conclusion that there are longer cycles of 50 year dura tion made of six juggler
cycles
4.  ilding cycles:‘Another type of cycle relates to the construction of buildings
which is of fairly regular duration . Its duration is twice that of major cycle and
its duration is on an average of 18 years .

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 profit margins and thus establishment of the brand name in the market.

3. S age x ee Ma uri

Stage three is the stage where the business reaches a certain maturity level
in terms of the market. The brand identity and brand image of the business
are well established at this stage. The customer base, investors, and other
important business networks are well laid at this point. The sales are either
increasing or at least have reached a considerable regular volume and require
less resources for advertising to enhance sales, however intensive marketing
is a must to enhance the overall market position or at least establish the
current market position. This is the phase where the company would want to
branch out into other ventures and dabble with product innov ation. This is the
business stage where the profit margins are fairly stable.

4. S age Four Re e ione line

Every business at some point of time undergoes a stage where it experiences

a decline in the sales and an overall unfavourable atmosphere in the market
termed as recession. This is nothing but a period of reduced economic
activity, which results in a sharp or considerable decline in buying, selling,
production, and even employment. The company might experience reduction
in profit margins or even loss depending on the market positions. This is the
phase where the company struggles to maintain its existence in the market
and trying its level best to equ ip itself for a quick recovery.

These are the four stages of business cycle experienced by every business big or
small. Sometimes the business flourishes and gains maximum profits, while at times
the business is on the verge of a complete breakdown. It is the attitude and the
positive perspective of successful businessmen that keeps every business goi ng
through the ups and downs and yet always aiming for the pinnacle.

Cau e of e Bu ine C le

Exogenou v . Endogenou
Within mainstream economics, the debate over external exogenous versus internal
endogenous causes of the economic cycle is centuries long, with the ³classical
school´ now neo classical arguing for exogenous causes and
the ³underconsumptionist´ now Keynesian school arguing for endogenous causes.
These may also broadly be classed as "supply side" and "demand side"
explanations: supply side explanations may be style d, as arguing that "supply

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creates its own demand", while demand side explanations argue that effective
demand may fall short of supply, yielding a recession or depression.
This debate has important policy consequences: proponent s of exogenous causes of
crises largely argue for minimal government policy or regulation Laisse Faire .
While, proponents of endogenous causes of crises largely argue for larger
government policy and regulation, as in absence of regulation, the market will move
from crisis to crisis.
These cycles can be explained on the basis of ³The Real Business Cycle Theory´.
Real Bu ine C le xeor states that business cycles occur as a result of
productivity changes occurred by real factors. The theory emphasi es the changes in
inter temporal substitution of labour and technology shocks and also consider that
government should not make interventions through monetary and fiscal poli cies as
economy automatically adjusts to these changes. If the economy does not adjust to
these changes it will be in recession.
According to this theory, labour supply depends on how workers response to the
incentives. Fluctuations in technology directly affects the labour productivity i.e. if
technology improves labour productivity and real wages increases causing the
output and employment to increase and if it regress the output and employment
decreases accordingly.

The theory also considers the other re al factors such as natural disasters and
weather conditions that can affect output. Another important point is that output and
money supply move together, money supply does not affect output.

There are found some flaws in real business cycle theory but in spite of its
drawbacks it is an important contribution to the understanding of concept of business
cycles.

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