Business cycles have phases including growth, peak, contraction, depression, and recovery. The economy is affected by these phases, which can spread to other parts, and can be difficult to measure. The contraction is the result of too much supply with not enough demand, leading to a depression, and the end stage is a period of low supply and demand until the economy enters a new phase of growth.
A business cycle is an economic phenomenon that individuals and nations observe in free-market economies. While many may think that there are different types of business cycles, the truth is that there are a few different phases in a single cycle. The most commonly observed phases include growth, peak, contraction, depression and recovery. These phases start with increases in economic output and then lead to recessions which contract the economy. Business cycles restart once the depression ends and the economy enters a new phase of growth.
Business cycles are an external force that affects more than one individual or company. The immediate actors in an economy are certainly influenced by the phases of the business cycle. As the economy enters the different stages, however, it can spread to other parts. For example, growth occurs when many companies begin to meet growing consumer demand through increased production. This growth may require more inputs from other countries, boosting the international economy.
It can be difficult to measure each stage of business cycles. In most cases, an economy will already be on stage once private sector companies, non-profit organizations, or governments have the ability to measure the economy quantitatively. For example, growth is often easy to measure because the increase in businesses or sales can indicate a period of growth. Peak periods and contractions are usually the hardest to determine. Companies typically seek out these periods to remove themselves from the market and maintain profits.
In classical terms, a contraction is the result of too much supply with not enough demand. The peak stage usually means that there is a balance between supply and demand. When the supply side of the equation begins to outnumber demand, a contraction can begin, among other more complex reasons. The contraction phase leads companies to reduce manufacturing and shuttering operations in order to meet the lower consumer demand. At the bottom of the contraction, a depression begins.
The end stage of business cycles is a period of low supply and demand compared to the peak stage. While the economy continues to move, it is much slower than before. Both private sector companies and governments tend to have lower profits and tax revenues, respectively. This continues until the free market purges excess corporations or supply from the economy. Once the supply side of the equation corrects itself, the economy often enters a new phase of growth.
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