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6Q. What is a business cycle? Describe the different phases of a business cycle.
Business Cycle:
The term business cycle refers to a wave like fluctuation in the overall level of economic activity particularly in
national output, income, employment and prices that occur in a more or less regular time sequence. It is nothing but
rhythmic fluctuations in the aggregate level of economic activity of a nation.
Different writers have defined business cycles in different ways.
According to Prof. Haberler: The business cycle in the general sense may be defined as an alternation of periods
of prosperity and depression of good and bad trade.
In the words of Prof. Gordon: Business cycles consists of recurring alternations of expansion and contraction in
aggregate economic activity, the alternating movements in each direction being self- reinforcing and pervading
virtually all parts of the economy.
According to Keynes: A trade cycle is composed of periods of good trade characterized by rising prices and low
unemployment percentages, alternating with periods of bad trade characterized by falling prices and high
unemployment percentages.
Thus, one can notice a common feature in all these definitions, i.e., variations in the aggregate level of economic
activities in different magnitudes.
Phases of a Business Cycle:
A Business Cycle has Five Phases. They are as follows:
1. Depression, contraction or downswing
It is the first phase of a trade cycle. It is a protracted period in which business activity is far below the normal level
and is extremely low. According to Prof. Haberler depression is a ―state of affairs in which the real income
consumed or volume of production per head and the rate of employment are falling and are sub-normal in the sense
that there are idle resources and unused capacity, especially unused labor‖.
During depression, all construction activities come to a more or less halting stage. Capital goods industries suffer
more than consumer goods industries. Since costs are ―sticky‖ and do not fall as rapidly as prices, the producers
suffer heavy losses. Prices of agricultural goods fall rapidly than industrial goods. During this period purchasing
power of money is very high but the general purchasing power of the community is very low. Thus, the aggregate
level of economic activity reaches its rock bottom position. It is the stage of trough. The economy enters the phase
of depression, as the process of depression is complete. It is also called, the period of slump.
During this period, there is disorder, demoralization, dislocation and disturbances in the normal working of the
economic system. Consequently, one can notice all-round pessimism, frustration and despair. The entire atmosphere
is gloomy and hopes are less. It is a period of great suffering and hardship to the people. Thus, it is the worst and
most fearful phase of the business cycle.
2. Recovery or revival
Depression cannot last long, forever. After a period of depression, recovery starts. It is a period where in, economic
activities receive stimulus and recover from the shocks. This is the lower turning point from depression to revival
towards upswing. Depression carries with itself the seeds of its own recovery. After sometime, the rays of hope
appear on the business horizon. Pessimism is slowly replaced by optimism. Recovery helps to restore the confidence
of the business people and create a favorable climate for business ventures.
As a result of these factors, business people take more risks and invest more. Low wages and low interest rates, low
production costs, recovery in marginal efficiency of capital etc induce the business people to take up new ventures.
In the early phase of the revival, there is considerable excess capacity in the economy so, the output increases
without a proportionate increase in total costs. Repairs, renewals and replacement of plants take place. Increase in
government expenditure stimulates the demand for consumption goods, which in its turn pushes up the demand for
capital goods. Construction activity receives an impetus. As a result, the level of output, income, employment,
wages, prices, profits, start rising. Rise in dividends induce the producers to float fresh investment proposals in the
stock market. Recovery in stock market begins. Share prices go up. Optimistic expectations generate a favorable
climate for new investment. Attracted by the profits, banks lend more money leading to a high level of investment.
The upward trends in business give a sort of fillip to economic activity. Through multiplier and acceleration effects,
the economy moves upward rapidly. It is to be noted that revival may be slow or fast, weak or strong; the wave of
recovery once initiated begins to feed upon itself. Generally, the process of recovery once started takes the economy
to the peak of prosperity.
3. Prosperity or Full-employment
The recovery once started gathers momentum. The cumulative process of recovery continues till the economy
reaches full employment. Full employment may be defined as a situation where in all available resources are fully
employed at the current wage rate. Hence, achieving full employment has become the most important objective of

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all most all economies. Now, there is all round stability in output, wages, prices, income, etc. According to Prof.
Haberler ―Prosperity is a state of affair in which the real income consumed, produced and the level of employment
are high or rising and there are no idle resources or unemployed workers or very few of either.‖
4. Boom or Over full Employment or Inflation
The prosperity phase does not stop at full employment. It gives way to the emergence of a boom. It is a phase where
in there will be an artificial and temporary prosperity in an economy. Business optimism stimulates further
investment leading to rapid expansion in all spheres of business activities during the stage of full employment,
unutilized capacity gradually disappears. Idle resources are fully employed. Hence, rise in investment can only mean
increased pressure for the available men and materials. Factor inputs become scarce commanding higher
remuneration. This leads to a rise in wages and prices. Production costs go up. Consequently, higher output is
obtained only at a higher cost of production.
Once full employment is reached, a further increase in the demand for factor inputs will lead to an increase in prices
rather than an increase in output and income. Demand for Loanable funds increases leading to a rise in interest rates.
Now there will be hectic economic activity. Soon a situation develops in which the number of jobs exceed the
number of workers available in the market. Such a situation is known as overfull employment or hyper-employment.
The boom carries with it the gems of its own destruction. The prosperity phase comes to an end when the forces
favoring expansion becomes progressively weak. Bottlenecks begin to appear. Scarcity of factor inputs and rise in
their prices disturb the cost calculations of the entrepreneurs. Now the entrepreneurs realize that they have over
stepped the mark and become over cautious and their over-optimism paves the way for their pessimism. Thus,
prosperity digs its own grave. Generally the failure of a company or a bank bursts the boom and ushers in a
recession.
5. Recession – A turn from prosperity to Depression
The period of recession begins when the phase of prosperity ends. It is a period of time where in the aggregate level
of economic activity starts declining. There is contraction or slowing down of business activities. After reaching the
peak point, demand for goods decline. Over investment and production creates imbalance between supply and
demand. Inventories of finished goods pile up. Future investment plans are given up. Orders placed for new
equipments and raw materials and other inputs are cancelled. Replacement of worn out capital is postponed. The
cancellation of orders for the inputs by the producers of consumer goods creates a chain reaction in the input market.
Incomes of the factor inputs decline this creates demand recession. In order to get rid of their high inventories, and
to clear off their bank obligations, producers reduce market prices. In anticipation of further fall in prices, consumers
postpone their purchases. Production schedules by firms are curtailed and workers are laid-off. Banks curtail credit.
Share prices decline and there will be slackness in stock and financial market. Consequently, there will be a decline
in investment, employment, income and consumption. Liquidity preference suddenly develops. Multiplier and
accelerator work in the reverse direction. Unemployment sets in the capital goods industries and with the passage of
time, it spreads to other industries also. The process of recession is complete. The wave of pessimism gets
transmitted to other sectors of the economy. The whole economic system thereby runs in to a crisis.
Failure of some business creates panic among businessmen and their confidence is shaken. Business pessimism
during this period is characterized by a feeling of hesitation, nervousness, doubt and fear. Prof. M. W. Lee remarks,
―A recession, once started, tends to build upon itself much as forest fire. Once under way, it tends to create its own
drafts and find internal impetus to its destructive ability‖. Once the recession starts, it becomes almost difficult to
stop the rot. It goes on gathering momentum and finally converts itself in to a full- fledged depression, which is the
period of utmost suffering for businessmen. Thus, now we have a full description about a business cycle.
A detailed study of the various phases of a business cycle is of paramount importance to the management. It helps
the management to formulate various anti-cyclical measures to be taken up to check the adverse effects of a trade
cycle and create the necessary conditions for ensuring stability in business.
Q3. A firm supplied 3000 pens at the rate of Rs 10. Next month, due to a rise of in the price to 22 Rs. per pen
the supply of the firm increases to 5000 pens. Find the elasticity of supply of the pens.
Of course, consumption is not the only thing that changes when prices go up or down. Businesses also respond to
price in their decisions about how much to produce. Economists define the price elasticity of supply as the
responsiveness of the quantity supplied of a good to its market price. More precisely, the price elasticity of supply is
the percentage change in quantity supplied divided by the percentage change in price.Suppose the amount supplied
is completely fixed, as in the case of perishable pen brought to market to be sold at whatever price they will fetch.
This is the limiting case of zero elasticity, or completely inelastic supply, which is a vertical supply curve. At the
other extreme, say that a tiny cut in price will cause the amount supplied to fall to zero, while the slightest rise in
price will coax out an indefinitely large supply. Here, the ratio of the percentage change in quantity supplied
percentage change in price is extremely large and gives rise to a horizontal supply curve. This is because the

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polar case of infinitely elastic supply. Between these extremes, we call elastic or inelastic depending upon whether
the percentage change in quantity is larger or smaller than the percentage change in price. Price elasticity of demand
is a ratio of two pure numbers, the numerator is the percentage change in the quantity demanded and the
denominator is the percentage change in price of the commodity. It is measured by the following formula:
Ep = Percentage change in quantity demanded/ Percentage changed in price Applying the provided data in the
equation: Percentage change in quantity demanded = (5000 – 3000)/3000Percentage changed in price=(22 – 10) /
10 Ep = ((5000 – 3000)/3000) / ((22 – 10)/10)= 1.2.
Q2. Give a brief description of:a. Implicit and explicit cost b. Actual and opportunity cost
a. Implicit and explicit cost
Implicit cost:In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is
the opportunity cost equal to what a firm must give up in order using factors which it neither purchases nor hires. It
is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results
from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing
not to work.Implicit costs also represent the divergence between economic profit (total revenues minus total costs,
where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit
costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to
accounting profit
Explicit cost:An explicit cost is a direct payment made to others in the course of running a business, such as wage,
rent and materials, as opposed to implicit costs, which are those where no actual payment is made. It is possible still
to underestimate these costs, however: for example, pension contributions and other "perks" must be taken into
account when considering the cost of labour.Explicit costs are taken into account along with implicit ones when
considering economic profit. Accounting profit only takes explicit costs into account.
b. Actual and opportunity cost
Actual cost:An actual amount paid or incurred, as opposed to estimated cost or standard cost. In contracting, actual
costs amount includes direct labor, direct material, and other direct charges.Cost accounting information is
designed for managers. Since managers are taking decisions only for their own organization, there is no need for
the information to be comparable to similar information from other organizations. Instead, the important criterion is
that the information must be relevant for decisions that managers operating in a particular environment
of business including strategy make. Cost accounting information is commonly used in financial
accounting information, but first we are concentrating in its use by managers to take decisions. The accountants who
handle the cost accounting information generate add value by providing good information to managers who are
taking decisions. Among the better decisions, the better performance of one's organization, regardless if it is a
manufacturing company, a bank, a non-profit organization, a government agency, a school club or even a business
school. The cost-accounting system is the result of decisions made by managers of an organization and the
environment in which they make them.
Opportunity cost:Opportunity cost is the cost of any activity measured in terms of the value of the next best
alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or
group, who has picked among several mutually exclusive choices. The opportunity cost is also the cost of the
forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as
expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part
in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or
financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should
also be considered opportunity costs.
Opportunity costs in production:Opportunity costs may be assessed in the decision-making process of production.
If the workers on a farm can produce either one million pounds of wheat or two million pounds of barley, then the
opportunity cost of producing one pound of wheat is the two pounds of barley forgone (assuming the production
possibilities frontier is linear). Firms would make rational decisions by weighing the sacrifices involved.
Q5. Explain in brief the relationship between TR, AR, and MR under different market condition.
Meaning and Different Types of Revenues
Revenue is the income received by the firm. There are three concepts of revenue –
1. Total revenue (T.R)
2. Average revenue (A.R)
3. Marginal revenue (M.R)
1. Total revenue (TR):Total revenue refers to the total amount of money that the firm receives from the sale
of its products, i.e. .gross revenue. In other words, it is the total sales receipts earned from the sale of its total
output produced over a given period of time. In brief, it refers to the total sales proceeds. It will vary with the firm‘s

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output and sales. We may show total revenue as a function of the total quantity sold at a given price as below.
TR = f (q). It implies that higher the sales, larger would be the TR and vice-versa. TR is calculated by multiplying
the quantity sold by its price. Thus, TR = PXQ. For e.g. a firm sells 5000 units of a commodity at the rate of Rs. 5
per unit, then TR would be
2. Average revenue (AR)
Average revenue is the revenue per unit of the commodity sold. It can be obtained by dividing the TR by the
number of units sold. Then, AR = TR/Q AR = 150/15= 10.
When different units of a commodity are sold at the same price, in the market, average revenue equals price at which
the commodity is sold for e.g. 2 units are sold at the rate of Rs.10 per unit, then total revenue would be Rs. 20
(2×10). Thus AR = TR/Q 20/2 = 10. Thus average revenue means price. Since the demand curve shows the
relationship between price and the quantity demanded, it also represents the average revenue or price at which the
various amounts of a commodity are sold, because the price offered by the buyer is the revenue from seller‘s point
of view. Therefore, average revenue curve of the firm is the same as demand curve of the consumer.
Therefore, in economics we use AR and price as synonymous except in the context of price discrimination by the
seller. Mathematically P = AR.
3. Marginal Revenue (MR)
Marginal revenue is the net increase in total revenue realized from selling one more unit of a product. It is the
additional revenue earned by selling an additional unit of output by the seller.
MR differs from the price of the product because it takes into account the effect of changes in price. For example if a
firm can sell 10 units at Rs.20 each or 11 units at Rs.19 each, then the marginal revenue from the eleventh unit is (10
× 20) - (11 × 19) = Rs.9.
Relationship between Total revenue, Average revenue and Marginal Revenue conceptsIn order to understand
the relationship between TR, AR and MR, we can prepare a hypothetical revenue schedule.
From the table, it is clear that:
MR falls as more units are sold.
TR increases as more units are sold but at a diminishing rate.TR is the highest when MR is zero
TR falls when MR become negative
AR and MR both falls, but fall in MR is greater than AR i.e., MR falls more steeply than AR.
Relationship between AR and MR and the nature of AR and MR curves under difference market conditions
1. under Perfect Market:Under perfect competition, an individual firm by its own action cannot influence the
market price. The market price is determined by the interaction between demand and supply forces. A firm can sell
any amount of goods at the existing market prices. Hence, the TR of the firm would increase proportionately with

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the output offered for sale. When the total revenue increases in direct proportion to the sale of output, the AR would
remain constant. Since the market price of it is constant without any variation due to changes in the units sold by the
individual firm, the extra output would fetch proportionate increase in the revenue. Hence, MR & AR will be equal
to each other and remain constant. This will be equal to price
Under perfect market condition, the AR curve will be a horizontal straight line and parallel to OX axis. This is
because a firm has to sell its product at the constant existing market price. The MR cure also coincides with the AR
curve. This is because additional units are sold at the same constant price in the market.
2. under Imperfect Market:Under all forms of imperfect markets, the relation between TR, AR, and MR is
different. This can be understood with the help of the following imaginary revenue schedule.
From the above table it is clear that:
In order to increase the sales, a firm is reducing its price, hence AR falls
As a result of fall in price, TR increase but at a diminishing rate
TR will be higher when MR is zero
TR falls when MR becomes negative
From the above table it is clear that:
In order to increase the sales, a firm is reducing its price, hence AR falls.
As a result of fall in price, TR increase but at a diminishing rate.
TR will be higher when MR is zero
TR falls when MR becomes negative
AR and MR both declines. But fall in MR will be greater than the fall in AR.

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The relationship between AR and MR curves is determined by the elasticity of demand on the
average revenue curve.
Under imperfect market, the AR curve of an individual firm slope downwards from left to right. This
is because; a firm can sell larger quantities only when it reduces the price. Hence, AR curve has a negative
slope.
The MR curve is similar to that of the AR curve. But MR is less than AR. AR and MR curves are different.
Generally MR curve lies below the AR curve.
The AR curve of the firm or the seller and the demand curve of the buyer is the same
Since, the demand curve represents graphically the quantities demanded by the buyers at various prices it shows the
AR at which the various amounts of the goods that are sold by the seller. This is because the price paid by the buyer
is the revenue for the seller (One man‘s expenditure is another man‘s income). Hence, the AR curve of the firm is
the same thing as that of the demand curve of the consumers.
Suppose, a consumer buys 10 units of a product when the price per unit is Rs.5 per unit.
Hence, the total expenditure is 10 x 5 = Rs.50/-. The seller is selling 10 units at the rate of Rs.5 per unit. Hence, his
total income is 10 x 5 = Rs.50/-.
Thus, it is clear that AR curve and demand curve is really one and the same.
Q1. Distinguish between a firm and an industry. Explain the equilibrium of a firm and industry under perfect
competition.
Distinguish between a firm and an industry
An industry is the name given to a certain type of manufacturing or retailing environment. For example, the retail
industry is the industry that involves everything from clothes to computers, anything in the shops that get sold to the
public. The retail industry is very vast and has many sub divisions, such as electrical and cosmetics. More
specialized industries deal with a specific thing. The steel industry is a more specialized industry, dealing with the
making of steel and selling it on to buyers.
The difference between this and a firm is that a firm is the company that operates within the industry to create the
product. The firm might be a factory, or the chain of stores that sells the clothes, within its industry. For example,
one firm that makes steel might be Aveda steel. They create the steel in that firm for the steel industry. A firm is
usually a corporate company that controls a number of chains in the industry it is operating within.
For example in retail, the firm Arcadia stores own the clothing chains Top shop, Dorothy Perkins, Miss Selfridge,
and Evans. These all operate for the firm Arcadia within the industry of retail.

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Several firms can operate in one industry to ensure that there is always competition to keep prices reasonable and
stop the market becoming a monopoly, which is where one firm is in charge of the whole industry. Sometimes, a
firm is not necessary within the industry and independent chains and retailers can enter straight into the market
without a firm behind them, although this is risky. This is because one of the advantages of having a firm behind you
is that it is a safeguard against possible bankruptcy because the firm can support the chain that it owns.
The equilibrium of a firm and industry under perfect competition
According to Miller, ―Firm is an organization that buys and hires resources and sells goods and services‖. Lipsey
has defined as ―firm is the unit that employs factors of production to produce commodities that it sells to other firms,
to households, or to the government. Industry is a group of firms producing standardized products in a market.
According to Lipsey, ―Industry is a group of firms that sells a well defined product or closely related set of
products.‖
Conditions of Equilibrium of the Firm and Industry
A firm is in equilibrium when it has no propensity to modify its level of productivity. It requires neither extension
nor retrenchment. It wants to earn maximum profits in by equating its marginal cost with its marginal revenue, i.e.
MC = MR. Diagrammatically, the conditions of equilibrium of the firm are
(1) the MC curve must equal the MR curve.
This is the first order and essential condition. But this is not a sufficient condition which may be fulfilled yet the
firm may not be in equilibrium.
(2) The MC curve must cut the MR curve from below and after the point of equilibrium it must be above the MR.
This is the second order condition. Under conditions of perfect competition, the MR curve of a firm overlaps with
the AR curve. The MR curve is parallel to the X axis. Hence the firm is in equilibrium when MC = MR = AR.
The first order figure (1), the MC curve cuts the MR curve first at point X. It contends the condition of MC = MR,
but it is not a point of maximum profits for the reason that after point X, the MC curve is beneath the MR curve. It
does not pay the firm to produce the minimum output OM when it can earn huge profits by producing beyond OM.
Point Y is of maximum profits where both the situations are fulfilled.
Amidst points X and Y it pays the firm to enlarges its productivity for the reason that it‘s MR > MC. It will
nevertheless stop additional production when it reaches the OM1 level of productivity where the firm fulfils both the
circumstances of equilibrium. If it has any plants to produce more than OM1 it will be incurring losses, for its
marginal cost exceeds its marginal revenue beyond the equilibrium point Y. The same finale hold good in the case
of straight line MC curve and it is presented in the figure.

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An industry is in equilibrium, first when there is no propensity for the firms either to leave or either the industry and
next, when each firm is also in equilibrium. The first clause entails that the average cost curves overlap with the
average revenue curves of all the firms in the industry.
They are earning only normal profits, which are believed to be incorporated in the average cost curves of the firms.
The second condition entails the equality of MC and MR. Under a perfectly competitive industry these two
circumstances must be fulfilled at the point of equilibrium i.e. MC = MR….
(1), AC = AR…. (2), AR = MR.
Hence MC = AC = AR. Such a position represents full equilibrium of the industry.
Short Run Equilibrium of the Firm and Industry
Short Run Equilibrium of the Firm
A firm is in equilibrium in the short run when it has no propensity to enlarge or contract its productivity and needs to
earn maximum profit or to incur minimum losses.
The short run is an epoch of time in which the firm can vary its productivity by changing the erratic factors of
production. The number of firms in the industry is fixed since neither the existing firms can leave nor new firms can
enter it.
Postulations
All firms use standardised factors of production
Firms are of diverse competence
Cost curves of firms are dissimilar from each other
All firms sell their produces at the equal price ascertained by demand and supply of the industry so that the
price of each firm, P (Price) = AR = MR
Firms produce and sell various volumes
The short run equilibrium of the firm can be described with the helps of marginal study and total cost
revenue study.
Marginal Cost, Marginal Revenue analysis – During the short run, a firm will produce only its price equals average
variable cost or is higher than the average variable cost (AVC). Furthermore, if the price is more than the averages
total costs, ATC, i.e. P = AR > ATC the firm will be earning super normal profits. If price equals the average total
costs, i.e. P = AR = ATC the firm will be earning normal profits or break even.
If price equals AVC, the firm will be incurring losses. If price drops even a little below AVC, the firm will shut
down since in order to produce it must cover atleast it‘s AVC through short run. So during the short run, under
perfect competition, affirm is in equilibrium in all the above mentioned stipulations.
Super normal profits – The firm will be earning super normal profits in the short run when price is higher than the
short run average cost.
Normal Profits = The firm may earn normal profits when price equals the short run average costs.
Total Cost – Total Revenue Analysis – The short run equilibrium of the firm can also be represented with the help of
total cost and total revenue curves. The firm is able to maximise its profits when the positive discrimination between
TR and TC is the greatest.

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Short Run Equilibrium of the Industry
An industry is in equilibrium in the short run when its total output remains steady there being no propensity to
enlarge or contract its productivity. If all firms are in equilibrium the industry is also in equilibrium. For full
equilibrium of the industry in the short run all firms must be earning normal profits.
But full equilibrium of the industry is by sheer accident for the reason that in the short rum some firms may be
earning super normal profits and some losses. Even then the industry is in short run equilibrium when its quantity
demanded and quantity supplied is equal at the price which clears the market.
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Q4. What is monetary policy?Explain the general objectives and instruments of monetary policy?
Monetary Policy
Monetary policy, in its narrow concept, is defined as the measures focused on regulating money supply. In harmony
with monetary policy goals, as will be shown later, and adopting the most common concept of monetary policy as
one of the central bank‘s functions, monetary policy is defined as ― the set of procedures and measures taken by
monetary authorities to manage money supply, interest and exchange rates and to influence credit conditions to
achieve certain economic objectives‖. We find this definition more consistent with the practical applications of
monetary policy, particularly with respect to the difference from one country to another in objectives selected as a
link between the instruments of monetary policy and its ultimate goals.
First: Monetary Policy and General Economic Policies
Monetary policy is basically a type of stabilization policy adopted by countries to deal with different economic
imbalances. Since monetary policy covers the monetary aspect of the general economic policy, a high level of co-
ordination is required between monetary policy and other instruments of economic policy. Further, the effectiveness
of monetary policy and its relative importance as a tool of economic stabilization various from one economy to
another, due to differences among economic structures, divergence in degrees of development in money and capital
markets resulting in differing degree of economic progress, and differences in prevailing economic conditions.
However, we may briefly mention that the weak effectiveness which is usually attributed to monetary policy in
developing countries is caused by the fact that the economic problems in these countries are mainly structural and
not monetary in nature, while the limited effectiveness of monetary policy in countries which lack developed money
markets occurs because monetary policy is deprived of one of its major tools, the instrument of open market
operations.
Also, there are those who belittle the effectiveness of monetary policy in time of recession, comparing the use of this
policy in controlling recession as ―pressing on a spring‖. Many others see monetary policy as ineffective in
controlling the inflation that results from an imbalance between the demand and supply of goods and services
originating from the supply side, while they confirm the effectiveness of monetary policy in controlling inflation that
results from increased demand. However, this does not preclude the effectiveness of monetary policy as a flexible

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instrument allowing the authorities to move quickly to achieve stabilization, apart from its importance in realizing
external equilibrium in open economies.
Monetary Policy Instruments
The set of instruments available to monetary authorities may differ from one country to another, according to
differences in political systems, economic structures, statutory and institutional procedures, development of money
and capital markets and other considerations. In most advanced capitalist countries, monetary authorities use one or
more of the following key instruments: changes in the legal reserve ratio, changes in the discount rate or the official
key bank rate, exchange rates and open market operations. In many instances, supplementary instruments are used,
known as instruments of direct supervision or qualitative instruments. Although the developing countries use one or
more of these instruments, taking into consideration the difference in their economic growth levels, the dissimilarity
in the patterns of their production structures and the degree of their of their link with the outside world, many resort
to the method of qualitative supervision, particularly those countries which face problems arising from the nature of
their economic structures. Although the effectiveness of monetary policy does not necessarily depend on using a
wide range of instruments, coordinated use of various instruments is essential to the application of a rational
monetary policy.
SET2
2Q. Define the term equilibrium. Explain the changes in market equilibrium and effects of shifts in supply
and demand.
Meaning of equilibrium
The word equilibrium is derived from the Latin word ―aequilibrium‖ which means equal balance. It means a state of
even balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized by
absence of change. It is a state where there is complete agreement of the economic plans of the various market
participants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta:
―Equilibrium denotes in economics absence of change in movement.‖
Changes in Market Equilibrium:
The changes in equilibrium price will occur when there will be shift either in demand curve or in supply curve or
both:
Effects of Shift in demand:
Demand changes when there is a change in the determinants of demand like the income, tastes, prices of substitutes
and complements, size of the population etc. If demand raises due to a change in any one of these conditions the
demand curve shifts upward to the right. If, on the other hand, demand falls, the demand curve shifts downward to
the left. Such rise and fall in demand are referred to as increase and decrease in demand.
A change in the market equilibrium caused by the shifts in demand can be explained with the help of a diagram.
Effects of Changes in Demand and Supply:
Changes can occur in both demand and supply conditions. The effects of such changes on the market equilibrium
depend on the rate of change in the two variables. If the rate of change in demand is matched with the rate of change
in supply there will be no change in the market equilibrium, the new equilibrium shows expanded market with
increased quantity of both supply and demand at the same price.
This is made clear from the diagram below:

11. MB0042
Similar will be the effects when the decrease in demand is greater than the decrease in supply on the market
equilibrium.
Q6. Suppose your manufacturing company planning to release a new product into market, Explain the
various methods forecasting for a new product.
When a manufacturing companies planning to release a new product into themarket, it should perform the demand
forecasting to check the demand of the product in the market and also the availability of similar product in the
market.
Demand forecasting for new products is quite different from that for established products. Here the firms will not
have any past experience or past data for this purpose. An intensive study of the economic and competitive
characteristics of the product should be made to make efficient forecasts.
As per Professor Joel Dean, few guidelines to make forecasting of demand for new products are:
a. Evolutionary approach
The demand for the new product may be considered as an outgrowth of an existing product. For e.g., Demand for
new Tata Indica, which is a modified version of Old Indica can most effectively be projected based on the sales of
the old Indica, the demand for new Pulsor can be forecasted based on the sales of the old Pulsar. Thus when a new
product is evolved from the old product, the demand conditions of the old product can be taken as a basis for
forecasting the demand for the new product.

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b. Substitute approach
If the new product developed serves as substitute for the existing product, the demand for the new product may be
worked out on the basis of a ‗market share‘. The growths of demand for all the products have to be worked out
on the basis of intelligent forecasts for independent variables that influence the demand for the substitutes. After
that, a portion of the market can be sliced out for the new product. For e.g., A moped as a substitute for a scooter, a
cell phone as a substitute for a land line. In some cases price plays an important role in shaping future demand for
the product.
c. Opinion Poll approach
Under this approach the potential buyers are directly contacted, or through the use of samples of the new product
and their responses are found out. These are finally blown up to forecast the demand for the new product.
d. Sales experience approach
Offer the new product for sale in a sample market; say supermarkets or big bazaars in big cities, which are also big
marketing centers. The product may be offered for sale through one super market and the estimate of sales obtained
may be ‗blown up‘ to arrive at estimated demand for the product.
e. Growth Curve approach
According to this, the rate of growth and the ultimate level of demand for the new product are estimated on the basis
of the pattern of growth of established products. For e.g., An Automobile Co., while introducing a new version of a
car will study the level of demand for the existing car.
f. Vicarious approach
A firm will survey consumers‘ reactions to a new product indirectly through getting in touch with some specialized
and informed dealers who have good knowledge about the market, about the different varieties of the product
already available in the market, the consumers‘ preferences etc. This helps in making a more efficient estimation of
future demand.
ORQ2. Define the term equilibrium. Explain the changes in market equilibrium and effects to shifts in supply
and demand.
Equilibrium
The word equilibrium is derived from the Latin word a ―equilibrium‖ which means equal balance. It means a state of
even balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized by
absence of change. It is a state where there is complete agreement of the economic plans of the various market
participants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta:
―Equilibrium denotes in economics absence of change in movement‖.
Market Equilibrium
There are two approaches to market equilibrium viz., partial equilibrium approach and the general equilibrium
approach. The partial equilibrium approach to pricing explains price determination of a single commodity keeping
the prices of other commodities constant. On the other hand, the general equilibrium approach explains the mutual
and simultaneous determination of the prices of all goods and factors. Thus it explains a multi market equilibrium
position.
Earlier to Marshall, there was a dispute among economists on whether the force of demand or the force of supply is
more important in determining price. Marshall gave equal importance to both demand and supply in the
determination of value or price. He compared supply and demand to a pair of scissors
We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of
paper, as whether value is governed by utility or cost of production. Thus neither the upper blade nor the lower blade
taken separately can cut the paper; both have their importance in the process of cutting. Likewise neither supply
alone, nor demand alone can determine the price of a commodity, both are equally important in the determination of
price. But the relative importance of the two may vary depending upon the time under consideration. Thus, the
demand of all consumers and the supply of all firms together determine the price of a commodity in the market.
Equilibrium between demand and supply price:
Equilibrium between demand and supply price is obtained by the interaction of these two forces. Price is an
independent variable. Demand and supply are dependent variables. They depend on price. Demand varies inversely
with price; arise in price causes a fall in demand and a fall in price causes a rise in demand. Thus the demand curve
will have a downward slope indicating the expansion of demand with a fall in price and contraction of demand with
a rise in price. On the other hand supply varies directly with the changes in price, a rise in price causes arise in
supply and a fall in price causes a fall in supply. Thus the supply curve will have an upward slope. At a point where
these two curves intersect with each other the equilibrium price is established. At this price quantity demanded is
equal to the quantity demanded.
This we can explain with the help of a table and a diagram

13. MB0042
In the table at Rs.20 the quantity demanded is equal to the quantity supplied. Since the price is agreeable to both the
buyer and sellers, there will be no tendency for it to change; this is called equilibrium price. Suppose the price falls
to Rs.5 the buyer will demand 30 units while the seller will supply only 5 units. Excess of demand over supply
pushes the price upward until it reaches the equilibrium position supply is equal to the demand. On the other hand if
the price rises to Rs.30 the buyer will demand only 5 units while the sellers are ready to supply 25 units. Sellers
compete with each other to sell more units of the commodity. Excess of supply over demand pushes the price
downward until it reaches the equilibrium. This process will continue till the equilibrium price of Rs.20 is reached.
Thus the interactions of demand and supply forces acting upon each other restore the equilibrium position in
the market. In the diagram DD is the demand curve, SS is the supply curve. Demand and supply are in equilibrium
at point E where the two curves intersect each other. OQ is the equilibrium output. OP is the equilibrium price.
Suppose the price OP2 is higher than the equilibrium price OP. at this point price quantity demanded isP2D2. Thus
D2S2 is the excess supply which the seller wants to push into the market, competition among the sellers will bring
down the price to the equilibrium level where the supply is equal to the demand. At price OP1, the buyers will
demand P1D1 quantity while the sellers are ready to sell P1S1. Demand exceeds supply. Excess demand for goods
pushes up the price; this process will go until equilibrium is reached where supply becomes equal to demand.
Q5. Explain how a product would reach equilibrium position with the help of ISO - Quants and ISO-Cost
curve.
When producing a good or service, how do suppliers determine the quantity of factors to hire? Below, we work
through an example where a representative producer answers this question.
Let‘s begin by making some assumptions. First, we shall assume that our producer chooses varying amounts of two
factors, capital (K) and labor (L). Each factor was a price that does not vary with output.
That is, the price of each unit of labor (w) and the price of each unit of capital (r) are assumed constant. We‘ll
further assume that w = $10 and r = $50. We can use this information to determine the producer‘s total cost. We call
the total cost equation an iso-cost line (it‘s similar to a budget constraint).
The producer‘s iso-cost line is:
10L + 50K = TC (1)
The producer‘s production function is assumed to take the following form:
q = (KL) 0.5 (2)
Our producer‘s first step is to decide how much output to produce. Suppose that quantity is 1000 units of output. In
order to produce those 1000 units of output, our producer must get a combination of L and K that makes (2) equal to
1000. Implicitly, this means that we must find a particular isoquant.
Set (2) equal to 1000 units of output, and solve for K. Doing so, we get the following equation for a specific iso-
quant (one of many possible iso-quants):
K = 1,000,000/L (2a)

14. MB0042
For any given value of L, (2a) gives us a corresponding value for K. Graphing these values, with K on the vertical
axis and L on the horizontal axis, we obtain the blue line on the graph below. Each point on this curve is represented
as a combination of K and L that yields an output level of 1000 units. Therefore, as we move along this iso-quant
output is constant (much like the fact that utility is constant as A basic understanding of statistics is a critical
component of informed decision making.
Q4. Critically examine the Marris growth maximizing model??
Profit maximization is traditional objective of a firm. Sales maximization objective is explained by Prof. Boumal.
On similar lines, Prof. Marris has developed another alternative growth maximization model in recent years. It is a
common factor to observe that each firm aims at maximizing its growth rate as this goal would answer many of the
objectives of a firm. Marris points out that a firm has to maximize its balanced growth rate over a period of time.
Marris assumes that the ownership and control of the firm is in the hands of two groups of people, i.e. owner and
managers. He further points out that both of them have two distinctive goals. Managers have a utility function in
which the amount of salary, status, position, power, prestige and security of job etc are the most import variable
where as in case of are more concerned about the size of output, volume of profits, market shares and sales
maximization.
Utility function of the manager and that the owner are expressed in the following manner-
Uo= f [size of output, market share, volume of profit, capital, public esteem etc.]
Um= f [salaries, power, status, prestige, job security etc.]
In view of Marris the realization of these two functions would depend on the size of the firm. Larger the firm,
greater would be the realization of these functions and vice-versa. Size of the firm according to Marris depends on
the amount of corporate capital which includes total volume of the asset, inventory level, cash reserve etc. He further
points out that the managers always aim at maximizing the rate of growth of the firm rather than growth in absolute
size of the firms. Generally managers like to stay in a grouping firm. Higher growth rate of the firm satisfy the
promotional opportunity of managers and also the share holders as they get more dividends.
B o u ma l ’ s S a l e s M a x i m i z a t i o n mo d e l :
Sales maximization model is an alternative for profit maximization model. This model is developed by Prof. W.J.
Boumal, an American economist. This alternative goal has assumed greater significance in the context of the growth
of the oligopolistic firms. The model highlights that the primary objective of the firm is to maximize its sales rather
than profit maximization. It states that the goal of the firm is maximization of sales revenue subject to a minimum
profit constraint. The minimum profit constraint is determined by the expectation of the share holders. This is
because no company can displease the shareholders. It is to be noted here that maximization of sales does not mean
maximization of physical sales but maximization of total sales revenue. Hence, the managers are more interested in
increasing sales rather than profit. The basic philosophy is that when sales are maximized automatically profits of
the company would also go up. Hence, attention is diverted to increase the sales of the company in recent years in
the context of highly competitive market.
How Profit Maximization model differs from Sales Maximization model:
The sale maximization model differs on the following grounds:
Emphasis is given on maximizing sales rather than profit.
Increase the competitive and operational ability of the company.
The amount of slack earning and salaries of the top managers are directly linked to it.
It helps in enhancing the prestige and reputation of top management, distributes more dividends to share
holders and increases the wage of the workers and keeps them happy.
The financial and other lending institutions always keep a watch on the sales revenue of a firm as it is an
indication of financial health of the firm.
Q5. Define Pricing Policy. Explain the various objective of pricing policy.
Pricing Policies
A detailed study of the market structure gives us information about the way in which prices are determined under
different market conditions. However, in reality, a firm adopts different policies and methods to fix the price of its
products.
Pricing policy refers to the policy of setting the price of the product or products and services by the management
after taking into account of various internal and external factors, forces and its own business objectives.
Pricing Policy basically depends on price theory that is the corner stone of economic theory. Pricing is considered as
one of the basic and central problems of economic theory in a modern economy. Fixing prices are the most
important aspect of managerial decision making because market price charged by the company affects the present
and future production plans, pattern of distribution, nature of marketing etc. Generally speaking, in economic theory,
we take into account of only two parties, i.e., buyers and sellers while fixing the prices. However, in practice many

15. MB0042
parties are associated with pricing of a product. They are rival competitors, potential rivals, middlemen, wholesalers,
retailers, commission agents and above all the Govt. Hence, we should give due consideration to theinfluence
exerted by these parties in the process of price determination. Broadly speaking, the various factors and forces that
affect the price are divided into two categories.
They are as follows:
I External Factors (Outside factors)
1. Demand, supply and their determinants.
2. Elasticity of demand and supply.
3. Degree of competition in the market.
4. Size of the market.
5. Good will, name, fame and reputation of a firm in the market.
6. Trends in the market.
7. Purchasing power of the buyers.
8. Bargaining power of customers
9. Buyers behavior in respect of particular product
II. Internal Factors (Inside Factors)
1. Objectives of the firm.
2. Production Costs.
3. Quality of the product and its characteristics.
4. Scale of production.
5. Efficient management of resources.
6. Policy towards percentage of profits and dividend distribution.
7. Advertising and sales promotion policies.
8. Wage policy and sales turn over policy etc.
9. The stages of the product on the product life cycle.
10. Use pattern of the product.
Objectives of the Price Policy:
A firm has multiple objectives today. In spite of several objectives, the ultimate aim of every business concern is to
maximize its profits. This is possible when the returns exceed costs. In this context, setting an ideal price for a
product assumes greater importance. Pricing objectives has to be established by top management to ensure not only
that the company‘s profitability is adequate but also that pricing is complementary to the total strategy of the
organization. While formulating the pricing policy, a firm has to consider various economic, social, political and
other factors.
The Following objectives are to be considered while fixing the prices of the product.
1. Profit maximization in the short term
The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objective
should be formulated in such a way as to maximize the sales revenue and profit. Maximum profit refers to the
highest possible of profit.
In the short run, a firm not only should be able to recover its total costs, but also should get excess revenue over
costs. This will build the morale of the firm and instill the spirit of confidence in its operations.
2. Profit optimization in the long run
The traditional profit maximization hypothesis may not prove beneficial in the long run. With the sole motive of
profit making a firm may resort to several kinds of unethical practices like charging exorbitant prices, follow
Monopoly Trade Practices (MTP), Restrictive Trade Practices (RTP) and Unfair Trade Practices (UTP) etc. This
may lead to opposition from the people. In order to over- come these evils, a firm instead of profit maximization,
and aims at profit optimization.
Optimum profit refers to the most ideal or desirable level of profit.
Hence, earning the most reasonable or optimum profit has become a part and parcel of a sound pricing policy of a
firm in recent years.
3. Price Stabilization
Price stabilization over a period of time is another objective. The prices as far as possible should not fluctuate too
often. Price instability creates uncertain atmosphere in business circles. Sales plan becomes difficult under such
circumstances. Hence, price stability is one of the prerequisite conditions for steady and persistent growth of a firm.
A stable price policy only can win the confidence of customers and may add to the good will of the concern. It
builds up the reputation and image of the firm.
4. Facing competitive situation

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One of the objectives of the pricing policy is to face the competitive situations in the market. In many cases, this
policy has been merely influenced by the market share psychology. Wherever companies are aware of specific
competitive products, they try to match the prices of their products with those of their rivals to expand the volume of
their business. Most of the firms are not merely interested in meeting competition but are keen to prevent it. Hence,
a firm is always busy with its counter business strategy.
5. Maintenance of market share
Market share refers to the share of a firm‘s sales of a particular product in the total sales of all firms in the market.
The economic strength and success of a firm is measured in terms of its market share. In a competitive world, each
firm makes a successful attempt to expand its market share. If it is impossible, it has to maintain its existing market
share. Any decline in market share is a symptom of the poor performance of a firm.
Hence, the pricing policy has to assist a firm to maintain its market share at any cost.
Q6. Discuss the various measures that may be taken by a firm to counteract the evil effects of a trade cycle.
FACTORS THAT SHAPE BUSINESS CYCLES
For centuries, economists in both the United States and Europe regarded economic downturns as "diseases" that had
to be treated; it followed, then, that economies characterized by growth and affluence were regarded as "healthy"
economies. By the end of the 19th century, however, many economists had begun to recognize that economies were
cyclical by their very nature, and studies increasingly turned to determining which factors were primarily
responsible for shaping the direction and disposition of national, regional, and industry-specific economies. Today,
economists, corporate executives, and business owners cite several factors as particularly important in shaping the
complexion of business environments.
VOLATILITY OF INVESTMENT SPENDING
Variations in investment spending is one of the important factors in business cycles. Investment spending is
considered the most volatile component of the aggregate or total demand (it varies much more from year to year
than the largest component of the aggregate demand, the consumption spending), and empirical studies by
economists have revealed that the volatility of the investment component is an important factor in explaining
business cycles in the United States. According to these studies, increases in investment spur a subsequent increase
in aggregate demand, leading to economic expansion. Decreases in investment have the opposite effect. Indeed,
economists can point to several points in American history in which the importance of investment spending was
made quite evident. The Great Depression, for instance, was caused by a collapse in investment spending in the
aftermath of the stock market crash of 1929. Similarly, prosperity of the late 1950s was attributed to a capital goods
boom.
There are several reasons for the volatility that can often be seen in investment spending. One generic reason is the
pace at which investment accelerates in response to upward trends in sales. This linkage, which is called the
acceleration principle by economists, can be briefly explained as follows. Suppose a firm is operating at full
capacity. When sales of its goods increase, output will have to be increased by increasing plant capacity through
further investment. As a result, changes in sales result in magnified percentage changes in investment expenditures.
This accelerates the pace of economic expansion, which generates greater income in the economy, leading to further
increases in sales. Thus, once the expansion starts, the pace of investment spending accelerates. In more concrete
terms, the response of the investment spending is related to the rate at which sales are increasing. In general, if an
increase in sales is expanding, investment is spending rises, and if an increase in sales has peaked and is beginning
to slow, investment spending falls. Thus, the pace of investment spending is influenced by changes in the rate of
sales.
MOMENTUM
Many economists cite a certain "follow-the-leader" mentality in consumer spending. In situations where consumer
confidence is high and people adopt more free-spending habits, other customers are deemed to be more likely to
increase their spending as well. Conversely, downturns in spending tend to be imitated as well.
TECHNOLOGICAL INNOVATIONS
Technological innovations can have an acute impact on business cycles. Indeed, technological breakthroughs in
communication, transportation, manufacturing, and other operational areas can have a ripple effect throughout an
industry or an economy. Technological innovations may relate to production and use of a new product or production
of an existing product using a new process. The video imaging and personal computer industries, for instance, have
undergone immense technological innovations in recent years, and the latter industry in particular has had a
pronounced impact on the business operations of countless organizations. However, technological innovations—and
consequent increases in investment—take place at irregular intervals. Fluctuating investments, due to variations in
the pace of technological innovations, lead to business fluctuations in the economy.

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There are many reasons why the pace of technological innovations varies. Major innovations do not occur every
day. Nor do they take place at a constant rate. Chance factors greatly influence the timing of major innovations, as
well as the number of innovations in a particular year. Economists consider the variations in technological
innovations as random (with no systematic pattern). Thus, irregularity in the pace of innovations in new products or
processes becomes a source of business fluctuations.
VARIATIONS IN INVENTORIES
Variations in inventories—expansion and contraction in the level of inventories of goods kept by businesses—also
contribute to business cycles. Inventories are the stocks of goods firms keep on hand to meet demand for their
products. How do variations in the level of inventories trigger changes in a business cycle? Usually, during a
business downturn, firms let their inventories decline. As inventories dwindle, businesses ultimately find themselves
short of inventories. As a result, they start increasing inventory levels by producing output greater than sales, leading
to an economic expansion. This expansion continues as long as the rate of increase in sales holds up and producers
continue to increase inventories at the preceding rate. However, as the rate of increase in sales slows, firms begin to
cut back on their inventory accumulation. The subsequent reduction in inventory investment dampens the economic
expansion, and eventually causes an economic downturn. The process then repeats itself all over again. It should be
noted that while variations in inventory levels impact overall rates of economic growth, the resulting business cycles
are not really long. The business cycles generated by fluctuations in inventories are called minor or short business
cycles. These periods, which usually last about two to four years, are sometimes also called inventory cycles.
FLUCTUATIONS IN GOVERNMENT SPENDING
Variations in government spending are yet another source of business fluctuations. This may appear to be an
unlikely source, as the government is widely considered to be a stabilizing force in the economy rather than a source
of economic fluctuations or instability. Nevertheless, government spending has been a major destabilizing force on
several occasions, especially during and after wars. Government spending increased by an enormous amount during
World War II, leading to an economic expansion that continued for several years after the war. Government
spending also increased, though to a smaller extent compared to World War II, during the Korean and Vietnam
wars. These also led to economic expansions. However, government spending not only contributes to economic
expansions, but economic contractions as well. In fact, the recession of 1953-54 was caused by the reduction in
government spending after the Korean War ended. More recently, the end of the Cold War resulted in a reduction in
defense spending by the United States that had a pronounced impact on certain defense-dependent industries and
geographic regions.
POLITICALLY GENERATED BUSINESS CYCLES
Many economists have hypothesized that business cycles are the result of the politically motivated use of
macroeconomic policies (monetary and fiscal policies) that are designed to serve the interest of politicians running
for re-election. The theory of political business cycles is predicated on the belief that elected officials (the president,
members of congress, governors, etc.) have a tendency to engineer expansionary macroeconomic policies in order to
aid their re-election efforts.
MONETARY POLICIES
Variations in the nation's monetary policies, independent of changes induced by political pressures, are an important
influence in business cycles as well. Use of fiscal policy—increased government spending and/or tax cuts—is the
most common way of boosting aggregate demand, causing an economic expansion. Moreover, the decisions of the
Federal Reserve, which controls interest rates, can have a dramatic impact on consumer and investor confidence as
well.
FLUCTUATIONS IN EXPORTS AND IMPORTS
The difference between exports and imports is the net foreign demand for goods and services, also called net
exports. Because net exports are a component of the aggregate demand in the economy, variations in exports and
imports can lead to business fluctuations as well. There are many reasons for variations in exports and imports over
time. Growth in the gross domestic product of an economy is the most important determinant of its demand for
imported goods—as people's incomes grow, their appetite for additional goods and services, including goods
produced abroad, increases. The opposite holds when foreign economies are growing—growth in incomes in foreign
countries also leads to an increased demand for imported goods by the residents of these countries. This, in turn,
causes U.S. exports to grow. Currency exchange rates can also have a dramatic impact on international trade—and
hence, domestic business cycles—as well.
KEYS TO SUCCESSFUL BUSINESS CYCLE MANAGEMENT
Small business owners can take several steps to help ensure that their establishments weather business cycles with a
minimum of uncertainty and damage. "The concept of cycle management may be relatively new," wrote Matthew
Gallagher in Chemical Marketing Reporter, "but it already has many adherents who agree that strategies that work at

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the bottom of a cycle need to be adopted as much as ones that work at the top of a cycle. While there will be no
definitive formula for every company, the approaches generally stress a long-term view which focuses on a firm's
key strengths and encourages it to plan with greater discretion at all times. Essentially, businesses are operating
toward operating on a more even keel."
Specific tips for managing business cycle downturns include the following:
Flexibility — According to Gallagher, "part of growth management is a flexible business plan that allows for
development times that span the entire cycle and includes alternative recession-resistant funding structures."
Long-Term Planning—Consultants encourage small businesses to adopt a moderate stance in their long-range
forecasting.
Attention to Customers—this can be an especially important factor for businesses seeking to emerge from an
economic downturn. "Staying close to the customers is a tough discipline to maintain in good times, but it is
especially crucial coming out of bad times," stated Arthur Daltas in Industry Week. "Your customer is the best test of
when your own upturn will arrive. Customers, especially industrial and commercial ones, can give you early
indications of their interest in placing large orders in coming months."
Objectivity—Small business owners need to maintain a high level of objectivity when riding business cycles.
Operational decisions based on hopes and desires rather than a sober examination of the facts can devastate a
business, especially in economic down periods.
Study—"Timing any action for an upturn is tricky, and the consequences of being early or late are serious," said
Daltas. "For example, expanding a sales force when the markets don't materialize not only places big demands on
working capital, but also makes it hard to sustain the motivation of the sales-people. If the force is improved too late,
the cost is decreased market share or decreased quality of the customer base. How does the company strike the right
balance between being early or late? Listening to economists, politicians, and media to get a sense of what is
happening is useful, but it is unwise to rely solely on their sources. The best route is to avoid trying to predict the
upturn. Instead, listen to your customers and know your own response-time requirements."