Category: 

What Are the Causes of Business Cycles?

Inflation, recession and consumer demand often shape business cycles in markets around the world.
Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Pollution from Asia is making Pacific storms stronger and changing North American weather patterns.  more...

September 18 ,  1977 :  The first photograph was taken of the Moon and the Earth together.  more...

Business cycles within an industry or even in the economy in general can come about for a number of reasons. Anticipating the end of one cycle and the beginning of a new one is very important to the financial well-being of a company, as well as anyone who chooses to invest in that company. Among the different causes of business cycles, issues such as changes in consumer wants and demands, a shift in the economy in general, and even new technology may trigger the end of one cycle and the beginning of a new one.

Among the various causes of business cycles, changes in the general economy are among the most common. The onset of a period of recession or inflation can have significant effects on the amount of revenue a company generates from sales of goods and services. With a recession, there is a chance that many consumers will no longer be able to purchase certain products, simply because of job losses and other issues that reduce the amount of household income. In like manner, inflation within the economy, especially when the price increases have to do with basic living needs such as food, clothing, and shelter may mean that while consumer income is stable, the amount that can be purchased with that income is reduced. In both scenarios, companies may find that less goods and services are sold, requiring the company to adjust production and general operations to comply with the current business or trade cycle.

Ad

Another of the typical causes of business cycles is change in consumer demand. Depending on the types of goods involved, consumers may simply tire of those products and determine to spend disposable income on other goods and services. When this is the case, the company is faced with the task of making changes to the products or the advertising as a means of regaining consumer interest, both from former customers and possibly new customers who’ve never tried the products in the past. In the interim, there will be a need to adjust production in order to prevent the accumulation of high inventory that languishes in warehouses for months, adding to the financial burden of the business.

Even new technology can serve as one of the causes of business cycles. Here, the advent of technological innovations may aid in streamlining production in ways that reduces operational costs, allowing the business to, over time, begin to earn more profit per unit sold. At the same time, new technology may prove to be the death knell for some companies who produce appliances and other electrical equipment that is now considered obsolete. Unless those companies can properly predict the causes of business cycles that are emerging and make place to adjust to the new business cycle, company revenues will decrease and the business will lose market share, possibly to the point of failing completely.

Ad

More from Wisegeek

You might also Like

Discuss this Article

SarahGen
Post 3

Even public psychology can affect the business cycle. For example, if people suddenly become pessimistic about the economy or their future, they might start saving more money and spend less. This will affect economic growth and investment negatively.

Sometimes, public confidence in the economy (or in a political institution) changes suddenly and the causes can vary. But this confidence has a direct impact on how the economy is doing. The business cycle is more volatile than it seems.

stoneMason
Post 2

@ddljohn-- Business cycles occur because of some type of disturbance in the economy.

Many people think that business cycles in the economy are inevitable and occur regardless of various factors but that's not true. There is always a reason for an economy experiencing a boom or a recession. It usually has to do with an imbalance in supply or demand. It could be due to wrong monetary policies in the country or unexpected spending, such as defense spending during wartime.

If circumstances and policies are right, it's possible to keep an economy in the boom stage for a very long time.

ddljohn
Post 1

I understand that business cycles in a company or economic sector may come about due to the business cycles in the general economy. But what causes business cycles in the general economy? It doesn't occur out of nowhere right?

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email