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Assignment: Analysis of the Business Cycle Essay Sample

Assignment: Analysis of the Business Cycle Pages
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Economic fluctuations are the rise and fall of economic activity relative to the long-term growth trend of the economy. U.S. Economic Fluctuations has two phases one is the periods of expansion and other is the contraction. The period of contraction includes recession and depression, Recession is mild contraction, a period of decline in total output and employment usually lasting at least two consecutive quarters. Depression is sharp decrease in the nation’s total production accompanied by high unemployment lasting more than a year. Periods of expansion Begin when economic activity starts to increase and continues until the economy reaches a peak. Now let us analyze the data taken government websites given above According to the business cycle theory an economy that undergoes no real growth for a period of six months or more is technically in recession. From seeing the table 1 of real GDP growth rate we can say that recession started from 3rd quarter of 2008 when the real GDP growth rate was -2.7% and continues till the 4th quarter with -5.4% negative growth of real GDP. At this point the U.S. economy was announced officially in recessionary phase; the current condition of GDP is that it is that it has taken a positive trend from 3rd quarter of 2009 with 5% growth rate.

The latest data on GDP real growth rate shows a positive but decreasing growth rate from 5% to 1%, this has happened because of the debt crises USA is facing from last 2 months, dollar value has gone down from AAA to AA, but we can say that the recovery phase has already started in United States. Table 2 and 3 shows the inflation rate and unemployment rate. During this recession the unemployment rate is high and inflation rate is low through this graph and table 2. The inflation rate is negative in July 2009 and the unemployment rate is highest with 9.5% in June 2009. In the year 2010 till the July unemployment rate has decline and stood at 9.5% whereas the inflation rate became positive but still lower at 0.1 on an average in June 2011. From the Table 2 and 3 for inflation rate and unemployment rate we can see the trend of positive growth. When inflation rate is picking up and the unemployment rate is going down from 10% to 9%. Table 4 depicts the consumer confidence index; it shows measures the degree of optimism of consumers towards the economy.

This is calculated with the help of consumers saving and spending trend. The consumer confidence index is showing positive trend from October 2009 through February 2011, but again decreasing since then. Overall not bad, and shows that the consumers have started spending on goods and services which will result in the increase in aggregate demand. Table 5 and 6 give the data of other variables such as consumer spending, business investment, government spending, exports, imports, and interest rate. Going through these data I have realized that the sign of recovery has started from the last months of year 2009 because the percentage change in net exports have increased, the consumers spending is positive from the 3rd quarter of 2009, the government spending is negative which means government has spent less during these months. The interest rate is 3.25 % constant for last 12 months and there is a percentage increase in import items again proved that the income of the Americans has increased. Analysis on Monopolistic Market Structure

The business cycle fluctuations affect all type of market structure, here we will discuss the effects of business cycle on monopolistic firm how it incurs losses and gains profit throughout the business cycle. The two monopolistic companies I have chosen are 1) the restaurant and 2) the chocolate company. Both the companies come under monopolistic market structure because of the presence of large number of firms and the free entry and exit, differentiated product etc. During the economic boom the demand for product is high and thus a firm can earn positive economic profits due to increased demand. actually during this time the demand for labor is also high thus increasing the cost of input, but since the demand for goods is high the firm can earn positive economic profit instead of high cost of labor we can see how with the help of diagram. The figure 1 shows the monopolistic firm in the period of expansion, due to increase in demand and higher production the average fixed cost is low and may be the average variable cost is higher due to increase in the demand for labor but, the net effect would be the lower average cost or due to the high prices the average revenue is more than the average cost. In any of the circumstances the firm is earning positive economic profit shown with the help of grey shaded rectangle.

Now let us see the situation in the period of recession and recovery. In recession the labor cost is low, but the demand for the product is also low thus the production level is also low due to this the average fixed cost is high which makes the average cost high. On the other hand it might also be possible that though the average cost is low due to low cost of input but the more intense lower demand for product makes the price of the product lower than the average cost. In both the circumstances the monopolistic would be incurring loss as shown in the graph below. We can see the losses in the grey shaded area (figure 2), how due to high average total cost and lower prices are making loss to the firm. The data given by BLS shows that the unemployment is high this is because of the lower production by firms due to lower demand. Now the current situation is that the GDP is growing positively, the aggregate demand has shifted towards right, that means the demand for the monopolistic products like food items, chocolates, and haircut will also increase.

This increase in demand for monopolistic products will shift the demand curve of the industry towards right due to the increase in income determinant of demand. The increase in demand will increase the price little bit and the firm again will start earning normal profit and may be super normal profit in boom period. Since current situation of the economy is improving so there will be improvement in the stock performance, the improvement in the stock performance will increase the demand and thus will increase the output. The derived demand of labor will also increase due to increase in the production goods and services which has caused due to increase in aggregate demand. Current and future sales revenue will definitely increase since the economy is in the recovery phase of the business cycle. The present sales revenue and the future sales revenue will increase as the economy goes from recovery to peak phase of product cycle. The increase in production level will increase the hiring of labors from the market.


Anderton, Alain 2004, Economics. (3rd Ed) Cause way press limited, Lancs. Bureau of labor statistics, inflation and prices available at http://www.bls.gov/data/ retrieved on 26th august 2011

Frank & Bernanke, 2007, Principles of Economics (3rd Ed) McGraw-hill Publishers, New York. Hirschey, Marks (2007). Economics for Managers. United States. Thomson south-western Publishers.

Mankiw, NG (2004) Principles of Economics 3rd Ed, Thomson South Western,
United States. Thomson south-western Publishers.

National economic accounts, available at www.bea.gov/national retrieved on 26th August 2011 The Federal Reserve, Bank Prime Loan, available at http://www.federalreserve.gov/releases/h15/update/ retrieved on 27th august 2011.

Consumer Confidence Index, available at http://future.aae.wisc.edu/data/monthly_values/by_area/998?area=US&tab=sales&grid=true retrieved on 27th august 2011.

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