Business Cycle Case Study
Introduction
Business cycle refers to the unsteadiness in business activities within a given economy over a given time. The business cycles are mainly characterized by periods of recession or expansion. During periods of expansion, the economy is experiencing growth, this is indicated by factors such as; increase in the rate of employment, increase in production processes within industries and increase in sales as well as incomes. The period of recession is when the economy is experiencing a contraction. Indicators of contraction in an economy are; unemployment, decrease in production processes and a decrease in sales and incomes.( Stock, pp 3-10)
Periods of expansion are measured from the bottom most of the previous business cycle, which is referred to as the trough to the top most of the current business cycle which is referred to the peak. Recession is determined from the differentiation of the peak of the previous cycle to the trough of the current cycle. Business cycles are used to determine the progress of an economy while in business it helps to rank the collection of one’s investment (Stock, pp 3-10)
Body
Expansions are highly anticipated as they indicate positive results of an economy or the stand of a number. Recessions are highly dreaded as they come with negative impacts. The following are the impacts of periods of recession to an economy and to businesses:
Unemployment – this is brought about by lay-offs of employees by businesses as they try to pull themselves out of the negative slump in their business cycle; this is done so as to reduce the cost of operations. Further recessions may lead to reductions in wages as well as a reduction in benefits enjoyed by employees.
Bankruptcy and increase in debts – Nations may be compelled by periods of recession to borrow money to avert their situation. Development is thwarted as efforts are concentrated to bail the country or company from debt.
Decline in stocks – When the value of stocks goes down due to recessions investors are scared away from investing into such a company. The result for shareholders who have already invested in such companies leads to the decline in dividends.
Poor quality goods and services – Manufacturer’s are least concerned by ensuring the quality of products they offer during periods of recession, this is in an attempt to reduce the cost of operations while aiming to improve the position of the company.
Reduction in tax revenue – Low profits by corporation leads to reduced taxes by corporations, low wages result to low taxes in income and low stamp duty from the fall in prices of houses.
Low demands of goods and services – Reduced purchasing power as a result of unemployment leads to low demand of goods and services which consequently affect the manufacturer as goods and services produced are not consumed.
The smooth running of operations of a business require proper planning on how to handle the various periods within a business cycle. Below are the strategies to manage the operations of a corporation within various business cycles as divided into various stages. (Stock, pp 12-34)
Marginal revenue refers to the increase in revenue as a result of output increase by one-unit . Marginal cost refers to the cost incurred in producing an extra unit of a particular good. Market equilibrium refers to equality in both demand and supply and where the demand and supply curve intersect. Marginal cost and marginal revenue are determinants of the output that maximizes output. Where the marginal revenue is less than marginal cost, then the firm should continue production. When marginal cost is equal to marginal cost, then a firm should stop continual production of the extra unit. When marginal revenue is less than marginal cost a firm should thus reduce the output it produces.
The laws of demand and supply dictate that when the demand is low so is the expected revenue. Due to this reason firms opt to reduce the cost of sale of a commodity. The result of reduction in cost of sale of a commodity is the reduction in revenue and thus the marginal cost will be more than the marginal revenue. When the demand is less so that a firm has to reduce the cost of sale of a commodity in order to sell the commodity, but the cost of production of the commodity is more than the expected revenue. (Stock, pp 34-45)
A firm can thus drive up its revenue to cover its cost of production by imposing a monopoly on the products it produces, this is by controlling the production process of the products they manufacture this can be by controlling the raw materials or imposing quotas on the regions that it sells its commodities. The peak price of a commodity is relatively higher as compared to the price of a commodity when the economy is at recession. During peak the demand of the products is high than at recession thus this creates a large number of customers willing to buy the commodity while at recession the price is relatively low as the number of customers willing to buy the commodity are fewer.
Stage Two
When the economy is at the trough there is need to reduce the cost of sale of a product. However, this has a negative effect on the cost of production of the product this is because the will be a reduction in the profit as compared to peak. The expected revenue will as well reduce due to reduction in cost of sale of a product in order to meet the markets demand as few people have the purchasing power to afford commodities. The strategy to match demand and supply is quite complex, this is because once you produce too many the result will raising the inventory and when you produce few products the result will not be able to meet demand. Thus, the best strategy to match demand and supply is to match the patterns of demand and supply by running the production process that also matches to demand and supply. (Stock, pp 40-50)
Stage Three
When the economy moves out of recession there is need to seize the opportunity to improve an organization in order to adjust to the new expansion as well as to match the supply and demand of a product. In order to achieve this organization should thus undertake the following strategies based on the determinants of supply and demand. Increase in quality of goods and services that an organization produces. Matching the cost of the products and services to the demand, this is because as the economy expands the purchasing power of consumer’s increases thus a better pricing mechanism is necessary. Reducing the cost of production, this is by ensuring that the marginal cost is less than the marginal revenue.
Macroeconomics refers to economics that involves phenomenon that alter an economy, this includes level of prices, decline in the economy, growth of an economy, unemployment, inflation and how all the listed factors relate to one another. The principle of macroeconomics studies three areas of study and how they relate to one another. The three areas of study affect the factors within an economy, including; workers, consumers, the government, producers and workers.( (Stock, pp 35-41)
Employment is one factor within the principles of macroeconomics; when the government ensures that it reduces the rate of unemployment as well as firms hire more personnel this helps to sustain the demand of products. The result of reducing unemployment rate is that people can have the purchasing power to purchase products, thus demand and supply will be consistent.
Economic output by minimizing the rate of inflation of products, this is dictated by the government as well as firms. Once the rate of inflation is reduced the willingness by customers to purchase a product is likely to be high as it is affordable, thus the rate of demand and supply will equate resulting to economic growth as well as growth of a firm. Maintaining a steady growth rate of development that is non-inflationary this ensures the consistent growth of an economy annually and minimizes negative fluctuation. Thus from the discussed points above a consistent annual growth in supply and demand as well as ability to price demand and supply is determined by: reducing unemployment, minimizing the rate of inflation of a commodity and maintaining a steady growth rate of development. (Stock, pp 3-64)
Work Cited
Stock, James H., and Mark W. Watson. “Business cycle fluctuations in US macroeconomic time series.” Handbook of macroeconomics 3rd Edition (2015): 3-64
