What Are the Causes of Business Cycles?

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.

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.