Everything in this world passes through good and bad times. Same is the financial business, profit maximization activities. Every one-gather finances invest it into business activity and imagine it flourishing always but circumstances never remains as per expectations. There are various factors inside the business activity and outside its control, which will shape the picture either, in growing or falling category.
Business needs many favorable forces to keep it steady, smooth and growing and this is rare that all of these forces will work inline. As example, rising pricing is the external force, which will adversely affect the internal activity being more expensive. The other force that is purchasing power of customer will not necessarily move in the same direction. Hence the outcome will be, more production cost but comparatively low income from customer.
Practically, every business has 4 stages:
Factors that bring this Business prosperity are:
More output, income, employment in market, more profits and hence standard of living.
Prosperity has characteristics
This stage is also called Boom stage. In this stage, business activity is on peak. Full employment of resources and maximum productivity. Gross national product rises and it results in high level of economic activity.
During this period, economic activities slow down, demand start falling. This result in production and investment plan given up. Unemployment, low income and output reduce business confidence and create pessimistic business opinion. Generally, this recession period lasts for shorter time.
When there is continuous decrease in business profits, income and resources living standard begins to fall.
Characteristic of business depression are
In depression there is under utilization of resources and fall in GNP. This creates low income, profits and economic activity which results at low point called trough.
This is period of revival, expansion and rise in economic activity. When production starts rising, production rises and output. Employment restored, improved income and profits. Again business confidence move towards optimism. This recovery slowly emerges into Boom and business cycle repeated.
Causes of Business Cycle
Rise in interest rates will reduce the finance available for business and spending power of consumer. Fall in interest rates open opportunity for businessman to borrow more finance and invest in business.
Consumer and Business confidence:
External event including natural disasters, political instability affect the Business man and consumer confidence negatively.
The multiplier effect states that a fall in injections may cause a bigger fall in Gross domestic product. For example if the government reduces public investment, there could be fall in cumulative demand, low output and a rise in unemployment. Moreover, those who lost their jobs would also spend less because of low income, creating even lower demand in the economy. However, an injection could have a positive multiplier effect.
A volatile business cycle is considered bad for the economy. A period of economic boom invariably leads to inflation with various economic costs. Those inflationary expansions tend to be unsustainable and causes to a bust. The biggest problem of the business cycle is that recession results in a large wastage of resources. An extended period of unemployment also results in loss of labour productivity as workers get discouraged and leave the labour market. Govt. interventions also have direct impact on stable or unstable Business cycle/trend.