Business Cycle Overview
A business cycle refers to the periods of business expansion and contraction. When the business cycle expands, it goes through the three stages of recovery, boom, and peak. When the business cycle contracts, it goes through the stages of recession, depression, and trough.
For economic purposes, a business cycle refers to businesses of all industries combined so that economists can make assumptions about the present and future state of the economy. However, business cycles can also be segmented to particular industries so that business owners can obtain information more directly related to their companies.
The underlying force of the business cycle is supply and demand. Businesses must adjust their supplies of inventory based on the level of customer demand. When customers feel nervous about the state of the economy, they reduce their spending. When customers reduce their spending, then businesses must reduce their levels of inventory, cut costs, and possibly lay off employees.
Entrepreneurs should consider the business cycle before starting their business so that they can adjust their entrance accordingly. For instance, when starting businesses during the peak stage, entrepreneurs need to be prepared for the upcoming decline in consumer demand. Operations should be lean and excess inventory levels avoided.