Economics 7b The Business Cycle. The Business Cycle: The performance of the American economy changes over time. This is called the business cycle.

Economics 7bThe 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.

RecessionA slowing of the economyBusiness fail, unemployment rises and profits fall.

Expansion Period of Economic GrowthThe 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.

DepressionLowest 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

Supply lower than demand

Effects: Higher Prices and Interest Rates

Money looses value

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.)

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.

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..

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.

What is a peak?

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.

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.

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.

How do unemployed workers negatively affect the

economy?

Economic expansion/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.

What is a negative result of economic expansion?

What are negative results of economic recessions?