5 Phases of Business Cycle – 2 Types of Cycle

Business are fundamental elements of the economy globally. They play their part to strengthen the economy of the state. Business can be small to large size, an example of a business can be a home industry to a farmhouse, a clothing brand, automobiles company, fan industry or a hardware industry. All kind of businesses faces ups and downs during their life course. They may face ups and downs, then fall and rise again, This is what we call Phases of Business Cycle.

When this kind of ups and downs occurs in many businesses gradually, an economic cycle can be monitored backed by Internal and External factors affecting it. More than 10 causes of business cycle are the core reasons for uncertainties in the market.

Types of Business Cycles

There are two main types of business cycle

  1. Classical Cycle which defines ups and downs in total production
  2. Growth Cycle which refers to fluctuation in the growth rate of production

Features of Business Cycles

Business cycles are actually considered as a guideline for the national economic strategists. Small size companies even large size businesses too bother about business cycles while they are planning for a specific new economical strategy. They decides whether to hire new workers in peak times or use existing staff for overtime, or to lay off the existing staff in trough phases, because in these phases unemployment and inflation may increase.

phases of business cycle diagram

Phases of Business Cycles

In business environment basically two phases are dominant, which are Prosperity & Depression, others phases are Expansion, Peak, Recession, Depression, Trough, and Recovery.

Sequence of Business Cycle
• 1
• 2
• 3
• 4
• 5
• 6
Names of Sequence
• Expansion
• Peak
• Recession
• Depression
• Through
• Recovery

Expansion

The very first phase of business cycles can be termed as an expansion. This phase is considered favorable for employment, daily wages, debtors, profit increases, investment and for sales and goods services. A businessmen may invest in a new project or start construction of a new company,  debtors may pay their debits and save their money in banks,  employees may start construction for their homes.

Peak

Second phase of business cycle is the prosperity phase in business. At this phase national economy achieve its highest position or peak and maximum growth is achieved. Manufacturers started manufacturing all the usable products for society and consumers are facilitated in this regard. In this situation investment in different businesses increases rapidly.

Recession

Recession is the third main phase of business cycle. In this phase a gradual fall can be measured in product prices, employment, investment and  income. Due to the lack of information about market trends and consumer demands  manufacturers keep on continue production of products like automobiles, machinery,  other sales and goods. In this situation consumers did not buy the products, excessive products are available in market and are still continue to supply. Gradually prices of products tends to go down.

Depression

After the recession phase, a prominent decline can be measured in employment, economy continuously falls down below the growth line, this phase is called the depression phase of the economy.

Trough

Trough is the most depressed and worst phase of an economy, in this phase economic negativity prevails rapidly. Investors stop investing in new projects, employees are fired because of the low economy, labours are offered jobs at low wages, unemployment prevails, sales and goods go down at their lowest, productivity vanishes. A negative and lowest decrease in economic growth is also observed. Investors thought to end their business and to move other countries, pessimistic thinking prevails in the business economy, debts increase again and are hard to pay, banks stop issuing new loans and interest increases.

Recovery

In this phase, the economy started recovering from the lowest growth rate. A positive thinking prevails in investors about investment and employment also. Due to the low prices, demand grows up, ultimately suppliers activated. In this regard economy gradually started strong again.

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