the impact of the business cycle
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Question: What do you know about the recent recession? What impacts did it have on the UK?
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Every day millions of people in the UK make decisions to buy goods and services. Businesses provide goods and services to final consumers and to customers who may be other businesses. The simple act of deciding whether to buy a chocolate bar from a local shop is an example of what we called economic activity.
Key term: ECONOMIC ACTIVITY - the amount of buying and selling that takes place in a period of time.
The economy is the term used to refer to all of the people and businesses in a country that engage in buying and selling. Over time, the level of economic activity changes. Sometimes the amount of buying and selling rises. People may feel confident about their jobs, their incomes may be rising and they make decisions to spend money. When people are going out and spending more money, we say the economy is expanding.
Key term: THE ECONOMY - the economic activity carried out by people and businesses in a country.
There are other times when people feel less confident about the future. There may be news about job losses, therefore people cut back on spending and postpone decisions to make some types of purchases. If this happens across the economy then the amount of buying and selling - economic activity - will fall.
Key term: ECONOMIC GROWTH - rises in the rate of economic activity in an economy. It is measured by calculating the value of sales in an economy over a period of time.
Fifty years ago, very few people owned a car. Today, there is one car on the roads for nearly every two people who live in the UK. People have become much better off over the last fifty years. People have many more electrical appliances in their homes and live longer because of better housing and receive better care from the NHS. One third of teenagers now go on to study at university. The reason for this is that there has been economic growth, averaging at around 2.5% a year. This means that every year, on average, the economy produces 2.5% more goods and services than it did the previous year.
Key term: BUSINESS CYCLE - fluctuations in the level of economic activity over a period of time. Most economies experience times when economic activity is rising and others when it is slowing.
On average, production and incomes have gone up by 2.5% over the last 50 years. However, in some years, it is more than this and in some years it is less. Over a period of time there tends to be a regular pattern to the level of economic activity. There might be a few years where economic activity is rising but then there are other years when the economy slows down. In some cases, this slowdown can be prolonged and this has a special name - recession. The tendency for economies to have different levels of economic activity is called the business cycle.
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How businesses are affected by different stages in the business cycle
In some years there is a strong increase in the level of economic activity. The economy is growing strongly (called a period of 'boom'). In these sorts of conditions, businesses tend to do well.
Key term: BOOM - a situation when the level of economic growth is positive.
Consumers feel confident enough to make decisions to buy large items, like cars or furniture. Many of these expensive items are bought on credit. So levels of borrowing are high too. Businesses that supply other businesses, like builders merchants, may also see an increase in their sales.
Strong economic growth does not last forever. There will be other times when economic activity begins to slow down. This is sometimes called a 'slowdown' or a 'downturn'. Consumer confidence will begin to fall and they may become less willing to borrow money to buy large items. Businesses may react by cutting their stock levels. They don't want to be left with large levels of stock that they cannot sell. Businesses understand that in such periods they may experience cash flow problems, so by reducing their levels of stock they reduce their outflows.
In a downturn, different businesses will be affected in different ways. How do you think the following businesses would be affected?
- Car dealership
- Supermarket
- Cinemas
- Estate agents
- Luxury watch manufacturers
- Takeaway restaurants
- Car dealership
- Supermarket
- Cinemas
- Estate agents
- Luxury watch manufacturers
- Takeaway restaurants
Businesses that sell 'essential' items like food might not see sales fall very much. Other firms such as restaurants or leisure providers who sell goods or services people see as 'luxuries' may see their sales fall quite dramatically. If people are cutting back on the 'luxuries', then they may for instance, decide that they don't need to decorate their home. Firms that sell paint and DIY items may see their sales fall. In turn, they order fewer supplies from manufacturers so these businesses also see their sales start to fall.
In a downturn, if people stop buying home appliances such as washing machines, which businesses are affected? What might be the effects on staff?
In some cases the slowdown can be quite severe. Businesses might see sales fall so far that they are forced to close down. This may then mean that people lose their jobs. They might find it hard to get other jobs so in turn they cut back on spending even more. Those who have jobs may be lucky to get a pay rise. Businesses who supply other businesses may have to close because they have lost their main customers.
The slowdown can be so bad that the amount of goods and services produced in one time period can actually be less than that produced in the previous one - the economy shrinks in size. In this case, economic growth will actually be negative.
Key term: RECESSION - a situation when the level of economic growth is negative for two successive quarters.
In a recession, businesses that sell luxury or expensive goods are particularly hard hit. Consumers may simply feel that they cannot afford to buy expensive products. These businesses may start making a loss instead of a profit, but they still have bills to pay like rent and utilities. They may have to halve their stock to reduce costs and potentially make some staff redundant.
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Create a comic strip (3 pictures for boom, 3 for recession) where you explain the impact of the business cycle on consumers and businesses.