2. Business Cycle or trade cycle refers to the recurring
ups and downs in the level of economic activity
which may last for several years.
Business Cycle
3.
4. Indicators of Business Cycle
(A) Production
• During recovery and prosperity periods agriculture
and production index will shows an upward trend
• In boom at its peak
• During recession the rate declines
• In depression at its least
(B) Unemployment rate
• Heavy demand for labour during recovery and
prosperity stages
• In boom least unemployment rate During recession
the rate declines
• In depression the unemployment rate shot up
5. (C) Income level and consumption
• Due to increase in employment during the recovery
and prosperity periods there will be an upward trend
takes place in per capita income level and level of
consumption
• During recession and depression the rate declines
(D) Rate of inflation
• A tolerable rise in the rate of inflation during
recovery and prosperity stages
• The inflation will become intolerable during boom
period
• The inflation will show a downward trend during
recession period
6. (E) Investment
• During the recovery and boom periods there is
optimism all around
• The amount of investment shrinks in time of
recession and depression
(F) Fiscal policy
Fiscal policy measures (Expenditure and taxation
policy) are designed by the Govt in such a way as
to encounter the evil effects of different phases of
business cycles
7. (G) Monetary Policy
The central bank makes appropriate changes in
monetary policy( Policies relating to money supply
and interest rates) to suit the requirements of different
phases of business
(H) Stock market indices
The general feeling of optimism and pessimism of
investors in a country are clearly reflected in the
movement of stock market indices
8. Use of Business Cycles in Business Decisions
1) Demand Forecasting
• During boom and recovery periods firm expects high
demand
2) Inventory Management
• During boom hold more inventories and during
depression comparatively low inventory
3) Pricing Decisions
• During boom periods the firm can charge more price
compared to depression stage
9. 4) Business Expansion
• Its apt time for the business to expand its activities
during the boom periods
5) Marketing Decisions
• The firm should use aggressive marketing strategies
during the depression periods to maintain the profit
10. Effect of Cyclical Fluctuations on Business Firms
1 On Production High demand during recovery and
boom periods
Less demand during recession and
depression
2 On Sales and Profit High sales turnover in recovery and
boom periods
Decline trend during depression
3 On Factor Price Rise in factor prices during recovery
and boom periods
Price diminishes and cost of
production reduces during
depression
11. 4 On Investments Huge demand, some times run out of
stock
Working capital(stock) may be
blocked up
5 On Cost of Fund Raise in rate of interest during
recovery and boom period due to
demand
Low arte during depression
6 The degree of competition Stiff competition during boom
periods
Most firms will be loss makers in
depression period
12. Measures to minimise the effect of
business cycle on firms
It is not possible to completely avoid the evil
effects of business cycle, business firms can at
least minimise its effect.
However the economists suggests that business
firms should adopt following measures to
minimise the effect of business cycle
1. Preventive Measures
2. Curative Measures
13. Preventive measures
These include safeguarding against swaying away
with the waves of expansion, so that the recession
may be minimised
a) Investments (balanced debt equity mix)
b) Inventory( Avoid over production during
boom period, JIT )
c) Products( Diversify products So risk can be
reduced)
14. Curative Measures or Relief Measures
Business cycles cannot be avoided. Relief measures are
to be undertaken to deal with the problems arising from
recession and depression
a) Pricing (Flexibility should be the right strategy,
adjusted to increase demand.)
b) Costing(control wastages and reduce costs)
c) Product (Focus on quality of the product)
15. Controlling Business Cycle
1.Monetary policy
A. Change in bank rate
• Boom :- Raises the bank rate to curb money
supply
• Depression :- Reduce rate to increase money
supply
B. Open Market operations
• Boom :- Sells securities and takes away the
disposable income from people
• Depression :- buys securities to give more money
in the hands of people
16. C. Change in Cash reserve Ratio
• Boom :- increases CRR to reduce
the lending capacity
• Depression :- decreases CRR so the bank
can increase lending
D. Change in Statutory Liquidity Ratio
• Boom :- increases SLR to reduce the
credit giving
• Depression :- decreases SLR so the bank
can increase its credit
17. 2. Fiscal Policies
A.Taxation Policy
• Boom :- increases tax rate and additional
taxes to take away excessive
purchasing power
• Depression :- reduces tax rates to enhance
purchasing power and increases
demand
B. Public Expenditure
• Boom :- Govt reduces its public expenditure
• Depression :- increases expenditure on pubic work
18. Business Forecasting
A forecast is a statement about the future value of a
variable such as demand.
Business forecasting is an estimate or prediction of
future developments in business such as sales,
expenditures, and profits
19. Methods of Business Forecasting
There are mainly two methods of
business forecasting,
1.Qualitative Methods
1.Quantitative Methods
20. Qualitative
Methods
Executive
Opinion
Approach in
which a group of
managers meet
and collectively
develop a
forecast
Market
Survey
Approach that
uses interviews
and surveys to
judge
preferences of
customer and to
assess demand
Delphi
Method
Approach in
which consensus
agreement is
reached among a
group of experts
Sales Force
Composite
Approach in
which each
salesperson
estimates sales in
his or her region
21. Quantitative
Methods
Time-Series Models
Time series models look at past patterns
of data and attempt to predict the future
based upon the underlying patterns
contained within those data.
Associative Models
Associative models (often called causal
models) assume that the variable being
forecasted is related to other variables in
the environment. They try to project
based upon those associations.
