Business Cycles and Inflation

8/4/2019 Business Cycles and Inflation

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Business

Cyclesand

Inflation


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Nature of Business Cycles

Cycles are

important feature

of nature.

The expansion

and contraction of

activities betrays

the existence of

business cycles.


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Phases of the Business Cycle

The prosperity

phase

The crisis (thecontraction or

recession) phase

The depressionphase

The recovery phase


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Prosperity phase

A period

where

continuous

expansion of

economicactivity

happens.


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Characteristics: High prices and great business activity

Large profits for business firms

Production is at full capacity

Increasing demand for many commodities

Increasing demand for labor

Increasing volume of sales

Increasing volume of credit extensions by

lenders

Large demand for credit

Rising interest rates


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Great

Business

Activity

Business

Firms

Great

Demand

LaborRaw

Materials &

other

commodities

Capital Land

Resulting to

Resulting to

Higher Outputs

Higher Sales

Higher Profits

Higher Wages

Higher Rent

Higher Interest Rates

Higher Prices of

Materials and Supplies

THE PROSPERITY PHASE


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Crisis or Recession Phase

When theeconomy has

reached thepeak ofexpansion and

contractionbegins to takeshape.


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Reduced

Business

Activity

Business

Firms

Reduced

Demand

LaborRaw

Materials &

other

commodities

Capital Land

Resulting to

Resulting to

Decreasing Outputs,

Sales, and Profits

Decreasing wages,

rent, interest rates,

prices of raw materials

and supplies

THE CRISIS OR RECESSION PHASE


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Depression phase

When

contraction of

economicactivities which

has began in the

recession phasehas reached its

lowest level.


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Characteristics: Many business have ceased operations

Profits are minimal, if it is still possible to make

some

Banks have plenty of idle funds Banks gradually reduce interest rates

Credit starts to become available

Unemployment is at its highest level

Many unemployed persons are willing to work at

lower wages

The prices of raw materials and supplies are low


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Greatly

Reduced

Business

Activity

Reduced Number of

Firms still operating

Very Low

Demand

LaborRaw

Materials &

other

commodities

Capital Land

Resulting to

Resulting to

Minimal Outputs,

Sales, and Profits

Low wages, rent,

interest rates, prices of

raw materials and

supplies

THE DEPRESSION PHASE


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Recovery phase Depression phase

cannot continueindefinitely.

Prices of variouseconomic resourcesare low, somebusiness firms that

have previouslyceased operationswill attempt tooperate again


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Characteristics: As the supply of commodities in the market gets

exhausted, demand for these begin to be felt;

Optimism among business men slowly develops,

prodding them to increase business activity;

The demand for labor increases, resulting to a decrease in

unemployment;

The purchasing power of the people rises;

The low rates of interest will attract business borrowings;

Prices slowly rise;

There is an increase in production output;

Idle plants are used and plans for construction of new

ones are considered.


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Increasing

Business

Activity

Business

Firms

Increasing

Demand

LaborRaw

Materials &

other

commodities

Capital Land

Resulting to

Resulting to

Increased Outputs,

Sales, and Profits

Increased wages, rent,

interest rates, prices of

raw materials and

supplies

THE RECOVERY PHASE


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The Business Cycle curve When plotted in a graph:

Highest point in the cycleis the prosperity phase orthe Peak period.

Lowest point is the

depression or the Troughperiod)

Descending linerepresents the recessionor the contraction

Ascending line representsthe recovery or expansionphase.

Trend line a generaltrend on the series of

business cycles.


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Common measures to control

business cycles The stabilization ofbusiness

Control of credit

Control of publicworks

Business forecasting

Monetary

readjustments Payment of high

wages

Economic planning


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Basic terms related to

inflation Price level

Used to indicate

how high or lowprices are in a

certain year

compared to theaverage of prices in

a certain base

period.


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inflation Market basket

Representativegroup of goods

and services

chosen by the

government togather information

of all commodities.


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inflation Price index

The index

number thatshows how theaverage price of

a bundle ofgoods haschanged over aperiod of time.


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inflation

Inflation

A rise in theaverage

level ofprices


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inflation Deflation

A decline inthe average

level ofprices


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Types of Inflation

Cost-push

inflation

Continualdecrease in the

aggregate supply

resulting toincrease in cost

of production.


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Types of Inflation

Demand-pull

inflation

Increase inaggregate

demand, thus

prices tend to goup.


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Types of Inflation

Inertial inflation

steady inflation

that occurs

when inflation is

built into

contracts and

peoples

expectations.

Documents

Business Cycles and Inflation