Business Cycle : A Brief Introduction and Its Phases

Business Cycle is inconstancy of the market which occurs in simultaneous phases and then repeats just like a wheel. We can say it is a cycle of four phases which are:

Boom, Recession, Depression, & Recovery.

Business cycle

It starts from recovery followed by a boom, recession & then depression. In depression phase, either business dies or keep the hold till recovery phase comes. The only recession and recovery phases can be determined in principle, whereas boom and depression are always determined after these stages passed. Now let’s discuss these phases in detail.

1. Boom Phase in Business Cycle:

It brings a lot of expansion and hence a prosperity phase. In this phase of Business Cycle, opportunities of growth are at the peak in business/country.

Boom phase
Key features of boom period are:

  • The production level is high.
  • Enhanced demand in the market.
  • Rising interest deposit rates.
  • Increase in prices of commodities (inflation).
  • Enhanced purchasing capacity.
  • Increase in opportunities for employment.
  • Increased level of investments.
  • High returns on Investments.

Due to above characteristics, there is an increase in employment opportunities, real purchase capacity, and demand in the market, which leads to more production (high prices, high profits). And all these factors at peak makes a phase which is Boom Phase of Business Cycle.

2. Recession Phase:

This is annexing phase from Boom (high growth) to Depression (lowest growth). After a certain point where everything was at a peak, numbers start to sink. And Demand is the key player here. During boom phase, demand and production were higher. And following fall in demand leads to over-production which halts ongoing production, followed by a decline in output. The drop in production leads to a recession in employment. Money circulation in the market decreases and people tend to save more rather than spend. Prices and profits start dropping due to inadequate demand. And this phase leads to depression period. Usually recession period of business cycle doesn’t stay longer.

3. Depression Phase:

just like its name, it brings a slowdown in the market. The continuous decrease in output, profits, leads to the following event:

  • The production level is defective.
  • Less demand in the market.
  • Low-interest rates.
  • Low prices (deflation).
  • Less purchasing power capacity.
  • Unemployment.
  • Low investments.
  • Fewer returns on investment.

Here, the economy is at its lowest; many businesses shut down during this phase due to the inability to tackle losses.

4. Recovery Phase of Business Cycle:

This phase is like rain after a drought. This is the transition phase between depression and boom. Here, demand starts stretching. It boosts production which leads to increased employment. Increased employment raises purchasing power, and hence more demand in the market. Prices of the commodities and profits start rising. It improves the morale of people in business, and they tend to invest more. Share markets also begin to stream, returns on investment also increase. And this phase goes till boom phase.

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