The Business Cycle (Cambridge (CIE) O Level Business Studies)

Revision Note

Written by: Lisa Eades

Reviewed by: Steve Vorster

The business cycle describes the upturns and downturns in the level of a country’s economic activity (Gross Domestic Product or GDP) over time
Economies do not experience consistent levels of growth over time

A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth
- Incomes and consumer demand fall, leading to reduced output
- Consumer and business confidence tend to be low
- Business profits fall and unemployment rises
A slump is an extended period of negative GDP growth
- Unemployment is likely to be high as a result of high levels of business failure
- Significant declines in household incomes and business profits
- Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses
The growth stage is a period of increasing rates of GDP growth
- Disposable income levels rise and lead to increased demand for products
- This drives an increase in production levels, which leads to a rise in employment levels
- Businesses look to expand and increase profit
A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth
- Consumer incomes and business profits are high
- Inflation is also high due to higher demand for goods and services
- Unemployment levels are low and wages are high due to a shortage of skilled workers

Unemployment and the Business Cycle

Recession and Slump Unemployment is likely to be rising	Growth and Boom Unemployment is likely to be falling
Businesses will find it relatively easy to recruit and retain workers Workers are unlikely to make demands for large pay increases as inflation is low and job security may be more important to them than pay Household incomes are reduced so some may choose to defer or cancel purchases Luxury brands may suffer large falls in revenue, whilst budget brands may increase their discounts Businesses that sell necessities are unlikely to be significantly affected	Businesses need to compete for skilled labour, and wages will increase due to rising inflation and low labour supply Employees may have greater power in the workplace leading to greater demands for improved terms and conditions of employment Household incomes and consumer confidence rise There is increased demand, particularly for luxury goods

Recession and Slump

Unemployment is likely to be rising

Growth and Boom
Unemployment is likely to be falling

Businesses will find it relatively easy to recruit and retain workers
Workers are unlikely to make demands for large pay increases as inflation is low and job security may be more important to them than pay
Household incomes are reduced so some may choose to defer or cancel purchases
- Luxury brands may suffer large falls in revenue, whilst budget brands may increase their discounts
- Businesses that sell necessities are unlikely to be significantly affected

Businesses need to compete for skilled labour, and wages will increase due to rising inflation and low labour supply
Employees may have greater power in the workplace leading to greater demands for improved terms and conditions of employment
Household incomes and consumer confidence rise
There is increased demand, particularly for luxury goods

Inflation is the sustained rise in prices in an economy over time
- In most countries, a price index measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods
After several decades of relatively low levels of inflation, much of Europe has recently experienced rapidly increasing inflation
- In the UK, inflation reached a peak of more than 11% in 2022, driven largely by increased fuel costs
- By late 2023, Eurozone inflation had returned to a relatively low level of 2.9%
High or fluctuating levels of inflation can be problematic for businesses

Problems Caused by Rising or Fluctuating Inflation

Problem	Explanation
Increased costs	Workers often demand higher wages to compensate for the increase in the cost of living Suppliers increase the cost of raw materials and components Utilities such as electricity become more expensive
Higher repayments on loans	Interest rates usually rise as central banks use the base rate as a tool to control inflation, making new and variable rate borrowing more expensive
Changing consumer spending habits	Rising inflation deters consumers from making significant purchases and they may reduce demand for lower-priced items too, e.g cinema tickets Purchasing on credit becomes more expensive
Reduced international competitiveness	Where domestic inflation rates are higher than those in other countries UK businesses are likely to be less competitive and lose sales Imports of overseas competitors are likely to be cheaper than domestic goods
Uncertainty	It occurs when businesses cannot predict prices, even in the short term Survival may need to become the key business objective until stability returns Spending and contract decisions are likely to be delayed

Increases in GDP are associated with growth and boom periods
- Although inflation is likely to rise, increases in household incomes may cancel out higher costs
- Recruiting and retaining workers may be challenging so businesses may seek to import labour from other countries
- Interest rates are likely to be high but increased consumer confidence may mean that spending on expensive items remains buoyant
A fall in GDP is associated with recession and slump periods
- Despite low inflation, household incomes will be squeezed and discretionary spending will be closely monitored or reduced
- Governments may take steps to stimulate the economy, which could lead to better public services, infrastructure or tax benefits for businesses
- Businesses could take advantage of low-cost borrowing due to low interest rates and invest for future business growth

Last updated: 23 October 2024

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