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BUSINESS CYCLE AND PRODUCTION FUNCTION
1. BUSINESS CYCLE
Stages of the Business Cycle
Economic growth is never achieved with a constant growth rate. It is characterized by deviation
up and down, towards economic growth. Boom or economic growth can be followed by an
economic downturn, expansion gives way to recession in which the level of GDP, employment,
and real income fall.
When the economic downturn phase ends, the economic growth phase begins, which can be
fast or slow. At this stage, the level of employment real firm income, and profits increase. Then
the cycle begins to repeat with economic downturns and increases.
It is the fluctuations of the main economic indicators against a general trend in economic
growth that form what are called business cycles.
Although business cycles differ from one another they have something in common. Each
business cycle is characterized by several identical phases. There are four phases of the
business cycle.
o Expansion
o Peak, the highest point of the cycle.
o Review phase (economic downturn)
o The lowest point of the cycle.
Expansion. Expansion or the phase of economic growth is the phase during which all
macroeconomic indicators are growing. The basic indicator that measures economic growth
is real GDP per capita. During the expansion phase, firm and consumer spending begin to
increase, aggregate demand shifts to the right, and further growth in output, employment,
and consumption occur.
The highest point. The expansion phase ends with reaching the highest point of the cycle.
In this phase, the economy is in its boom. All economic indicators are at their highest level.
Firms normally produce close to or in their production capacities, so the economy operates
at full potential and in full employment. And all economic resources are used to the
maximum.
Recession. Officially an economic review occurs only when real GDP falls during two
consecutive calendar quarters. During the review firms and consumers reduce their
spending levels. Firms reduce production, reduce raw material costs, reduce investment
costs, and extract out of work a certain number of workers. As a result, firms' profits fall, so
some firms manage to stay in business, while others go bankrupt.
BUSINESS CYCLE AND PRODUCTION FUNCTION
1. BUSINESS CYCLE
Stages of the Business Cycle
Economic growth is never achieved with a constant growth rate. It is characterized by deviation
up and down, towards economic growth. Boom or economic growth can be followed by an
economic downturn, expansion gives way to recession in which the level of GDP, employment,
and real income fall.
When the economic downturn phase ends, the economic growth phase begins, which can be
fast or slow. At this stage, the level of employment real firm income, and profits increase. Then
the cycle begins to repeat with economic downturns and increases.
It is the fluctuations of the main economic indicators against a general trend in economic
growth that form what are called business cycles.
Although business cycles differ from one another they have something in common. Each
business cycle is characterized by several identical phases. There are four phases of the
business cycle.
o Expansion
o Peak, the highest point of the cycle.
o Review phase (economic downturn)
o The lowest point of the cycle.
Expansion. Expansion or the phase of economic growth is the phase during which all
macroeconomic indicators are growing. The basic indicator that measures economic growth
is real GDP per capita. During the expansion phase, firm and consumer spending begin to
increase, aggregate demand shifts to the right, and further growth in output, employment,
and consumption occur.
The highest point. The expansion phase ends with reaching the highest point of the cycle.
In this phase, the economy is in its boom. All economic indicators are at their highest level.
Firms normally produce close to or in their production capacities, so the economy operates
at full potential and in full employment. And all economic resources are used to the
maximum.
Recession. Officially an economic review occurs only when real GDP falls during two
consecutive calendar quarters. During the review firms and consumers reduce their
spending levels. Firms reduce production, reduce raw material costs, reduce investment
costs, and extract out of work a certain number of workers. As a result, firms' profits fall, so
some firms manage to stay in business, while others go bankrupt.
