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Objectives

Give an example that shows how a change in one part of the economy can cause a change in another part.

List the three phases of the business cycle.

Make a graph of a business cycle and label the phases.

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Objectives

Describe economic conditions during each phase of the business cycle.

Describe the level of GDP and unemployment rate during each phase of the cycle.

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Marketing Terms

expansion contraction business cycle upward spiral downward spiral

prosperity recession depression recovery

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The status of a market economy goes up and down, like a roller coaster

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Market EconomyDynamics

A market economy is either growing or slowing

List some signs of economic growth.List some signs of economic slowdown.

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Market EconomyDynamics

Expansion period of economic growth prosperity economic good times

Contraction period of economic slowdown hardship economic bad times

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Market EconomyDynamics

Periods of expansion alternate with

– periods of contraction

This alternation of economic expansion and contraction is called the business cycle

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Economic Spirals

All parts of an economy are interconnected

A change in one part can cause a

change in another part

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Economic Spirals

Upward spiral When one part

of the economy does well

it causes other parts of the economy– to do well Productivity up

Expansion

Sales up

Company earns more

Workers buy more

Workers earn more

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Economic Spirals

Downward spiral When one part

of the economy does poorly

it causes other parts of the economy– to do poorly

Productivity down

Contraction

Sales down

Company earns less

Workers buy less

Workers earn less

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The Business Cycle

To understand business cycles economists make graphs

They plot GDP or percent change in GDP

– over time

Even though each business cycle is different each has the same basic shape

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Business Cycle

Time

GD

P

Expansion

Contraction

Peak

TroughTrough

Recove

ryR

ecessionProsperity

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How is the graph of a business cyclelike a roller coaster?

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The Business Cycle

Every business cycle graph has one peak (high point) one trough (low point)

Every business cycle graph has one period of expansion one period of contraction

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The Business Cycle

The high and low points on a graph help identify the three phases in each business cycle prosperity recession recovery

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Business Cycle

Time

GD

P

Recove

ryR

ecessionProsperity

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Prosperity

Prosperity occurs around the

peak of the business cycle

economic good times people doing well

What happens economicallyduring prosperity?

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Prosperity

During a period of prosperity consumers buy more retail sales rise and inventories fall production increases businesses hire more workers

Economic indicators GDP rises unemployment is low CPI and inflation rise only a little

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Recession

Recession occurs on the down

slope of the business cycle

economic hard times people doing poorly

What happens economically during recession?

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Recession

During a period of recession consumers buy less retail sales fall and inventory rises production slows businesses fire workers

Economic indicators GDP falls unemployment rises

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Depression

Depression economic

contraction severe long lasting causes widespread

economic hardship

Great Depression 1929 to 1941

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Recovery

Recovery occurs after a

recession occurs on the up

slope of a business cycle

economy getting better

people starting to do better

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Recovery

During a recovery period consumers start buying more retail sales rise and inventories fall businesses start producing more businesses hire more people

Economic indicators GDP rises unemployment starts falling

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Business Cycle and Economic Indicators

Each phase of the business cycle has typical economic indicators

Economists and marketers study economic indicators

– to predict what will happen in the economy

– to help make good business decisions

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* Sometimes before and during a depression, inflation is very, very high.

Business Cycle and Economic IndicatorsProsperity

before the peak

Recession contraction

Depression severe

contraction

Recovery expansion

GDP

Unemployment Rate

CPI/Inflation * Stock Market

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Review

What is the difference between expansion and contraction in the economy?

What is a business cycle? Describe the three phases in a

business cycle. What is the impact of economic

interconnectedness?

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Glossary

business cycle. Alternating periods of expansion and contraction in the economy.

contraction. Period of economic slowdown.

depression. Economic slowdown that is very severe and lasts a long time.

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Glossary

downward spiral. Process that starts moving downward slowly, and then starts moving faster and faster downward.

expansion. Period of economic growth. prosperity. Economic good times, when

people are doing well financially.

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Glossary

recession. Period of economic contraction.

recovery. Period after a recession during which the economy is expanding.

upward spiral. Process that starts moving upward slowly, and then increases its upward movement faster and faster.