Concept

• Business cycles are the wave like

fluctuations in economic activity as
reflected in the business economic
variables like employment, income,
output and price level.
• These fluctuations are cyclic in nature.
• The sequence of changes in business
cycle recur frequently and in similar
pattern.
Characteristics:
• Minor cycle has a duration of 3 to 4 years and major cycle
has a duration of 6 to 12 years.
• During prosperity business cycle activity is usually above
the trend, while during depression it is below the trend.
• Prosperity takes twice as much time to develop as
depression.
• The phases and sequence is same in all cycles.
• If the boom is high the succeeding depression will also be
severe, but the reverse is not true.
Phases of Business cycle:
1.Recovery
2.Prosperity
3.Recession
4.Depression
Recovery:

• Revival of demand
• Economic activity and general prices start
rising
• Production picks up
• Rise in employment
• Businessmen repay the loans
• Expansion in business activity
• Banks are liberal in the matter of advances
Prosperity:
• Rapid cumulative movement of prices,
employment, income and production.
• Total output starts growing at a rapid pace.
• There is great incentive for new investment.
• There is general optimism in business and it
leads to inflationary rice in prices.
• Retailers and wholesaler buy more than what is
demanded.
Recession

• Industrial output decreases

• Employment starts falling
• Bank advances starts falling
• Cost of production declines gradually
• Bank reserves suffers setback
• Investment and profit falls slowly
Depression

• General demand for goods and services falls faster

than production of goods.
• Selling prices falling faster than their cost.
• Depression is characterized by low prices ,idle funds
with banks , mass unemployment ,and slack trade.
• Investment falls rapidly.
• Business psychology is highly pessimistic.
Factors causing swings in
business activity:
• Banking operations.
• Changes in proportion between
capital goods and consumer goods.
• Purchasing power.
• Profit mania of producer.
• Human psychology.
• Cyclical changes in weather.
Control measures:

1. Preventive measures
2. Curative measures
3. Government policies:
• Monetary policy
• Fiscal policy
Preventive measures:

• Equilibrium between demand and

supply.
• Inventories and financial
commitment do not exceed financial
resources.
• The overhead cost per unit of output
should not be allow to go up.
Curative measures:

• Proper monitoring of cost

• Changes in quality and nature of product.
• Changes in selling methods and strategies.
• Introduction of new product in depression
phase.
• In time of depression firm can utilize a part of
its retained profits.
Government policies:
• Monetary policy: • Fiscal policy:
1. Bank rate 1. Deliberate
variations changing of taxes.
2. Open market 2. Changes in
operations. government
3. Varying reserve spending.
ratio.