This chapter was taken from the book ECONOMICS 3rd edition by Feliciano Fajardo. This is for classroom instruction purposes.. Thank you

1. Chapter 9
PRINCIPLES OF ECONOMICS
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2. No country has ever experienced
economic growth with economic stability over
a long period of time. Even the richest
country in the world like US has gone through
the ups and downs of its economy.

3. A Business Cycle refers to fluctuations in the
economy. There are “peaks and valleys” which are
caused by several factors like technologies, wars,
politics, monetary conditions and levels of total
spending. However there are also changes in
business activities which are non-cyclical like
Christmas time or school opening.

4. Theories of Business Cycles
1. EXOGENEOUS THEORIES. Forces outside the
economic system create the business cycle. Examples:
wars, political developments, and natural disasters.
2. ENDOGENOUS THEORIES. Forces within the
economic system cause the fluctuations in the economy.
Examples: accelerators, multipliers, innovations, etc..
Several theories explain the changing behavior of the
economy . This can be classified into two.

5. Phases of the Cycle
1. Prosperity. This is the peak of the business cycle.
There is full employment, and the national output is at full
capacity or close to it.
2. Recession. Both production and employment fall. The
price level is likely to decrease only if recession is of
longer duration
3. Depression. Both production and employment are at
their lowest level. This is the valley of the business cycle.
4. Recovery. Both production rise towards full
employment. During this stage price level may increase.

6. Business
Activities
Time
The Business Cycle

7. Effects of Business Cycles
During bad economic times like recession and depression,
various sectors and individuals are affected in different ways. For
instance, those who produce capital goods like trucks, building,
farm machines and so forth are greatly affected in terms of
production and employment. Firms have no reason to buy capital
goods when economic or business activities are down.
However, in the case of basic products which are non-
durables. They are less sensitive to recession or depression. Food
is very vital to consumers. Its purchase cannot wait for a long time.
People have to eat.

8. Unemployment
There are various cause of unemployment such as changes in
technology, renovations, business cycles and seasons. Some of these cause are
temporary in nature.
Types of Unemployment
1. Frictional unemployment. This is cause by interruptions in
production for technical reasons, or when workers are temporarily laid off due to
renovation works.
2. Structural unemployment. A change in technology renders the
skills and talents of some workers obsolete. Example: the use of modern
technology reduces number of workers.
3. Cyclical unemployment. This is cause by the fall of business
activities in the economy. When aggregate demand decreases, production
subsequently declines. Some workers have to be laid off.
4. Seasonal unemployment. During slack periods, many workers in
farming and construction are laid off.

9. Full Employment
When there is an available job for every person who is
willing and able to work, it is full employment.
Full Employment Policies
1. Shorter work week. A reduction of work week from 44 to 40
hrs would increase the number of workers.
2. Postponement of technological developments.
The application of technology in production is not recommended,
instead, they are encourage to engage in labor-intensive industries
to reduce unemployment problems.
3. Public Investment. The government should utilize its
resources to increase demand for goods and services.

10. Inflation
There is INFLATION when there is rising general level of prices. It
adversely affects many sectors of the economy, particularly the fixed-
income groups. Needless to say that their purchasing power declines as
prices rise.
Types of Inflation
1. Demand-pull inflation. This occurs when demand for goods
and services exceeds supply.
2. Cost-push inflation. It is claimed that the use of time and
labor-saving devices decreases the number of workers.
3. Structural inflation. This view explains that inability of some
sectors of our economy to respond immediately to demand for
goods and services.