Business Cycle (Cambridge (CIE) IGCSE Business): Revision Note

Stages of the business cycle

• The business cycle describes the upturns and downturns in the level of a country’s economic activity (gross domestic product or GDP) over time

• Economies do not experience consistent levels of growth over time

The business cycle

Growth

• The growth stage is a period of increasing rates of GDP growth

  • Disposable income levels rise and lead to increased demand for products

  • This drives an increase in production levels, which leads to a rise in employment levels

  • Businesses look to expand and increase profit

Boom

• A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth

  • Consumer incomes and business profits are high

  • Inflation is also high due to higher demand for goods and services

  • Unemployment levels are low and wages are high due to a shortage of skilled workers

Recession

• A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth

  • Incomes and consumer demand fall, leading to reduced output

  • Consumer and business confidence tend to be low

  • Business profits fall and unemployment rises

Slump

• A slump is an extended period of negative GDP growth

  • Unemployment is likely to be high as a result of high levels of business failure

  • Significant declines in household incomes and business profits

  • Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses

The impact of the business cycle on business

• Businesses must adapt their strategies at each stage of the cycle

  • For example, cutting costs in a recession or investing in growth during a boom

Impacts at each stage of the business cycle

Effects of employment, inflation, and economic growth on a business

1. Employment Levels

• Slump and recession (low employment/high unemployment)

  • Many people out of work → consumer demand falls, especially for non-essential goods

  • Easier and cheaper to recruit staff (wages lower, labour supply higher)

  • Risk of low staff motivation and morale if job insecurity is high

• Boom and growth (high employment/low unemployment)

  • More people in work → consumer demand and sales rise

  • Harder to recruit staff (skills shortages, competition)

  • Wages may rise, increasing business costs

2. Inflation

• Slump and recession (low inflation or even deflation)

  • Falling prices may encourage consumers to delay spending, reducing sales

  • Lower inflation = more stable costs, easier planning for businesses

  • Risk of squeezed revenue if prices cannot be maintained

• Boom and growth (higher inflation likely)

  • Rising costs of raw materials and wages reduce profit margins

  • Businesses may need to raise prices, but risk losing customers

  • Uncertainty in pricing makes planning and forecasting difficult

3. Economic Growth

• Slump and recession (low/negative growth)

  • Consumer incomes fall → lower demand, especially for luxury or non-essential goods

  • Businesses may cut investment, delay expansion, or make redundancies

  • Some opportunities for “inferior goods” (low-cost options) as consumers switch to cheaper products

• Boom and growth (high/positive growth)

  • Rising incomes → strong demand for goods and services

  • More opportunities to expand, innovate, and increase profits

  • Risk of higher costs (wages, rent, raw materials) as demand outstrips supply