MMS Managerial Economics Sem 1

3. • A wave like fluctuations of economic activity
characterised by recurring phases of expansion &
contraction in periods varying from 3 to 4 yrs.
• Fluctuations found in aggregate economic activity
of nations
• A cycle consists of general expansions, followed
by general recessions, contractions & revivals
which merge with the expansion of next cycle.
• The sequence of change is recurrent but not
periodic.

6. • Recurring fluctuations : occur in a free rhythm,
recurrence of expansion & contraction has no
fixed period
• Period of business cycle is longer than a year
typically 3-4 yrs
• Presence of alternating forces of expansion &
contraction – these forces are built into the
system
• Phenomenon of the crisis : peak & trough are
asymmetrical

7. • Every business cycle has the critical mark-off points of
peak & trough
• From trough to peak there is a expansion phase & from
peak to trough the contraction phase.
• Apart from these two longer phases there are two
other turning points
• Upper turning point located at the peak marks the
beginning of recession
• Lower turning point located at trough is venue of
revival
• Both recession & revival phases are relatively shorter
in duration

8. • According to Burns & Mitchell there are 4
distinct phases :
• Revival
• Expansion
• Recession
• Contraction

9. • The expansion phase begins from an
equilibrium position under the stimulus of
forces which create expectations of rising
profits which in turn induce entrepreneurs to
increase the scope of their activities
• Leads to more employment, more demand for
raw materials, leads to larger employment in
other industries, more wages, increase in
demand for consumption goods.

10. • Rapid increase in supply and modest increase
in prices
• Supply in later stages increases with a lag &
this leads to rise in prices which gathers
momentum later on
• Delay in price rise due to unutilized plant
capacity available in the early stages, later
stages bottlenecks appear.

11. • Rise in prices more marked when large
proportion of productive capacity is set up.
• New factories, steel plants, increased
production of heavy engineering goods,
commercial & housing complexes, power
projects
• Increase in income, consumption
• Supply of consumption goods does not keep
pace so increase in price

12. • Distortions of price relations: price do not rise
uniformly during this phase
• Prices of raw materials & semi finished goods
rises faster than prices of consumption goods
• Wages, salaries, interest rates, taxes lag
behind

13. • Expansion reaching its height – rising profits &
optimism about its continuance boost the stock prices
• Increase in investment by entrepreneurs – higher
output, prices & profits
• Expansion in money supply especially bank credit
• Confidence in business induce banks to expand credit,
speed up velocity of circulation of money
• Leads to growth of fixed capital – plant, machinery &
equipment, wage increases, consumption increases
• Manufacturers, wholesalers & retailers stock up
inventories

14. • The end of expansion – expansion itself brings
into play forces which lead to recession
• Gradual rise of costs relative to prices,
narrows down profit margin & expansion gets
weakened.
• During later phase increase in cost due to
growing pressure of demand for materials,
labour & finace.

15. • This phase is a turning point & relatively shorter
• Forces of expansion weakened & those of
contraction strengthened.
• Recession is characterised by liquidation in stock
market, strains in banking system, some fall in
prices, sharp reduction in demand for capital &
abandoning projects
• Production of consumer goods does not decline
immediately – people persist with their living
standards for sometime despite fall in income.
• It falls with a lag.

16. • In contrast fall in production of capital goods is
dramatic
• Abandoning of investment programs, demand for
equipment, machinery & plant fall
• Most dramatic & noticeable signs of recessions
advent is the weakening of the stock market
• Borrowers on stock market find that their
collateral is shrinking & find it necessary to repay
some of their loans.

17. • New issues are postponed – corporate shelve
their investment program
• Orders for plant, machinery, equipment or
buildings are reduced
• Banks are reluctant to expand the volume of
credit

18. • Recession ultimately merges into depression which is
the phase of relatively low economic activity
• When economy moves from recession to depression
there is a notable fall in production & employment
• Agriculture & retail is affected less, manufacturing,
mining, construction etc are affected more
• Industrial sector : worst affected are those which
produce machines, tools, plants, equipment & steel.

19. • There is a substantial reduction in incomes of people &
thus the demand for consumer goods & services
decline
• Still decline is far less than the demand for machines &
equipment
• Substantial reduction in demand for durable goods
• General price level falls, producers & wholesalers
seeing falling demand liquidate inventories piled up
during prosperity phase.
• Leads to increase in supply & fall in prices, also
reduced purchasing power due to contraction also
leads to fall in price

20. • Steadily declining prices erode the profits of
producers & traders alike
• Pessimism crawls, no new investment, reduction
in bank credit, distortions in price structure
• Distortion also appear in cost-price relations
because costs do not fall proportionately to
prices
• Wages & salaries are sticky, rents, interest rates,
insurance premium & taxes are slow to move
downwords
• Prices keep falling & profit margins are wiped out

21. • Recovery starts when forces that work to restore
the normal price relations & cost price relations
start operating effectively
• Recovery is gradual, starts when price stops
falling
• When inventories are exhausted, supplies reach
scarcity levels & downward movement of prices is
arrested then producers see no risk in
undertaking production
• Demand for durable goods & investment starts
increasing