Economics 7b The Business Cycle

The Business Cycle: The performance of the American economy changes over time. This is called the business cycle.

Peak Point at which the expansion of the economy and the inflation that accompany it stop. The high point of the economy. Recession A slowing of the economy Business fail, unemployment rises and profits fall. Expansion Period of Economic Growth The economy grows; employment grows and demand for goods and services increases. People have money and the demand for goods and services increases causing inflation, a rise in prices. Depression Lowest point of the economy; unemployment is high. Because unemployed people cannot afford to buy goods and services, many businesses fail.

Inflation: A general rise in the cost of goods and services Causes: Shortage of goods Causes: Shortage of goods Supply lower than demand Supply lower than demand Effects: Higher Prices and Interest Rates Effects: Higher Prices and Interest Rates Money looses value Money looses value Unemployment Unemployment

The tendency is for the economy to go from good times to bad, then back to good times again. This process is called the business cycle and is quite common to free-market economies.

What is the business cycle?

Expansion When the economy is booming, the gross domestic product (GDP) increases. (The GDP is the total amount of goods and services produced by the country in one year.) When the economy is booming, the gross domestic product (GDP) increases. (The GDP is the total amount of goods and services produced by the country in one year.) This period of growth is called expansion because the economy is expanding, or growing. The expansion of the economy during a boom is generally good—most people have jobs and businesses are doing well. This period of growth is called expansion because the economy is expanding, or growing. The expansion of the economy during a boom is generally good—most people have jobs and businesses are doing well.

Describe life during periods of Expansion?

What is inflation?

Inflation However, expansion can cause problems. One problem that often accompanies a boom is inflation. Inflation refers to a rise in the costs of goods and services. However, expansion can cause problems. One problem that often accompanies a boom is inflation. Inflation refers to a rise in the costs of goods and services. During periods of prosperity, people have money to spend, causing the demand for goods and services to increase. Prices inflate, or rise, as customers compete with each other to buy scarce products. During periods of prosperity, people have money to spend, causing the demand for goods and services to increase. Prices inflate, or rise, as customers compete with each other to buy scarce products.

Cost of Production The costs of doing business also increase during a period of economic expansion. Increased competition forces businesses to pay higher prices for raw materials and transportation.. The costs of doing business also increase during a period of economic expansion. Increased competition forces businesses to pay higher prices for raw materials and transportation.. Because jobs are more plentiful, businesses may also have to increase the wages of their workers to keep them. Wages, payments for raw materials, transportation, rent, and interest on money borrowed are the costs of production. When inflation makes these costs rise, business firms may have to increase the prices of their products to make a profit. Because jobs are more plentiful, businesses may also have to increase the wages of their workers to keep them. Wages, payments for raw materials, transportation, rent, and interest on money borrowed are the costs of production. When inflation makes these costs rise, business firms may have to increase the prices of their products to make a profit.

What are the costs of production?

Why does the cost of doing business rise during periods of expansion?

Peak At some point, the expansion of the economy and the inflation that goes with it stop. When this happens, the business cycle has reached a peak, or high point. At some point, the expansion of the economy and the inflation that goes with it stop. When this happens, the business cycle has reached a peak, or high point.

What is a peak?

Contraction After the economy peaks, business activity begins to slow. This economic slowdown is called a contraction. After the economy peaks, business activity begins to slow. This economic slowdown is called a contraction.

What is contraction?

Recession If the contraction becomes severe enough, a recession may occur. During a recession, businesses fail, more people are unemployed, and profits fall. If the contraction becomes severe enough, a recession may occur. During a recession, businesses fail, more people are unemployed, and profits fall.

What is a recession?

Rising prices… Problems such as inflation, unemployment, and recession pose serious challenges to the economy and to individual citizens. Consider inflation, for example. When prices increase faster than wages, people cannot buy as much with their money. Rising prices thus hurt the purchasing power of the dollar and can lower the standard of living for everyone. Problems such as inflation, unemployment, and recession pose serious challenges to the economy and to individual citizens. Consider inflation, for example. When prices increase faster than wages, people cannot buy as much with their money. Rising prices thus hurt the purchasing power of the dollar and can lower the standard of living for everyone.

Why is inflation a problem for people on a fixed income?

Unemployment Unemployment is also harmful. Unemployed workers cannot pay bills or taxes and they buy fewer goods and services. Sometimes unemployed people must seek government assistance, which costs taxpayers money. Unemployment is also harmful. Unemployed workers cannot pay bills or taxes and they buy fewer goods and services. Sometimes unemployed people must seek government assistance, which costs taxpayers money.

How do unemployed workers negatively affect the economy?

Economic expansion/recession Production, spending, and consumer demand decline during periods of recession. Production, spending, and consumer demand decline during periods of recession. Because businesses are producing less, they need fewer workers. As a result, unemployment increases. This unemployment contributes to a decrease in individual savings, which banks depend on. As a result, banks have less money to lend to businesses. Because businesses are producing less, they need fewer workers. As a result, unemployment increases. This unemployment contributes to a decrease in individual savings, which banks depend on. As a result, banks have less money to lend to businesses.

What is a negative result of economic expansion?

What are negative results of economic recessions?