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Demand and the Business Cycle

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Demand and the Business Cycle Definition Over time, most firms experience a sequence of changes in the level of demand for their products. This sequence is called the business cycle. Demand will grow for a period of years, peaking in a boom phase. This is followed by a downturn in which business conditions become difficult and demand slackens. For a time, demand may grow very slowly, be static, or actually decline. Eventually demand picks up and the most businesses begin to recover. Some businesses are affected by the business cycle more than others. Cyclical Changes Cyclical trend such as (recovery, recession, boom) are trends in the economy which affect all businesses GDP stands for Gross Domestic Product. It means the value of all the output from the economy for the year. It is one of the standard measures of the size of the economy for the year. The figure is normally 'deflated' to remove the effects of inflation, so it can be used to measure real income, and so it can also be used to make comparisons over time. ...read more.


Recovery phases can last a long time. Initially businesses use their under-utilised capital equipment to increase output. When they are running at full capacity, they put expansion plans in motion, investing in new buildings, plant and machinery. THE BOOM * As investment increases, suppliers have difficulty supplying to all firms * Most businesses are working flat out * Many businesses experience shortages of skilled labour * Firms bid against each other for employees, so wages increase faster than inflation * Prices are increased * Higher demand means that higher prices have little effect on the growth of sales * Inflation increase DOWNTURN The rising costs associated with a boom, will in time discourage continuing growth. They have a tendency to reduce profitability and the attractiveness of further investment. But usually government anticipates the need to damp down the economy. Rising interest rates put people off spending. Consumers who have to pay more for their mortgages spend less on consumer goods. Businesses which borrow to finance investment find their calculations less favourable when they have to pay higher interest charges. ...read more.


CONSUMER DURABLES Changes in spending on consumer durables affect the economy in the same way that investment spending does. This is because purchases can be postponed or brought forward. Like the changes in stocks, changes in demand for durables can explain the nature of business fluctuations. How businesses are affected Often it is during recessions that businesses address their weaknesses. If they survive the recession they may emerge stronger and better able to compete. They may use improved human resource management strategies, new technologies, or more efficient approaches to organisation generally. They may try to predict the start of a recession to be ready for when it comes. One way to survive a recession is to diversify the product range so that the business is not too dependant for its profits on items which are likely to experience wide variations in demand over the course of the cycle. This can be a good strategy for suppliers of consumer goods, but maybe of little help to a supplier of, e.g. specialist steels. Such firms would need to make sufficient profits during economic upturns to survive the difficult times. Shareholders should come to expect a wide variation in profits over time. ...read more.

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