Economic Concepts
Business Cycles/Economic Cycle/ Trade Cycle
-the rise and fall in production output of goods and
services in an economy.
-are generally measured using the rise and fall in the
real gross domestic product (GDP) or the GDP adjusted
for inflation.
The business cycle is characterized by expansion and
contraction. During expansion, the economy
experiences growth, while a contraction is a period of
economic decline. Contractions are also called
recessions.
Stages of the Business Cycle
1. Expansion
In this stage, there is an increase in positive
economic indicators such as employment, income,
output, wages, profits, demand, and supply of
goods and services. Debtors are generally paying
their debts on time, the velocity of the money
supply is high, and investment is high. This process
continues as long as economic conditions are
favorable for expansion.
2. Peak
The maximum limit of growth is attained. The
economic indicators do not grow further and are at
their highest. Prices are at their peak. This stage
marks the reversal point in the trend of economic
growth. Consumers tend to restructure their
budgets at this point.
3. Recession
The demand for goods and services starts declining
rapidly and steadily in this phase. Producers do not
notice the decrease in demand instantly and go on
producing, which creates a situation of excess
supply in the market. Prices tend to fall. All positive
economic indicators such as income, output, wages,
etc., consequently start to fall.
4. Depression
There is a commensurate rise in unemployment.
The growth in the economy continues to decline,
and as this falls below the steady growth line, the
stage is called depression. The economy’s growth
rate becomes negative. There is further decline
until the prices of factors, as well as the demand
and supply of goods and services, reach their lowest
point.
5. Trough
It is the negative saturation point for an economy.
There is extensive depletion of national income and
expenditure.
6. Recovery
In this phase, there is a turnaround from the trough
and the economy starts recovering from the
negative growth rate. Demand starts to pick up due
to the lowest prices and, consequently, supply
starts reacting, too. The economy develops a
positive attitude towards investment and
employment and production starts increasing.
Employment begins to rise and, due to accumulated
cash balances with the bankers, lending also shows
positive signals. In this phase, depreciated capital is
replaced by producers, leading to new investments
in the production process.
Recovery continues until the economy returns to
steady growth levels. It completes one full business
cycle of boom and contraction. The extreme points
are the peak and the trough.
FACTORS THAT SHAPE BUSINESS CYCLES
1. Volatility of Investment Spending
2. Momentum or “follow-the-leader” mentality in
consumer spending
3. Technological Innovations
4. Variations in Inventories
5. Fluctuations in Government Spending
6. Politically Generated Business Cycles
7. Monetary Policies
8. Fluctuations in Exports and Imports
TYPES OF ECONOMIC MARKET
1. Perfect Competition
In a perfect competition market structure, there are a
large number of buyers and sellers. All the sellers of the
market are small sellers in competition with each other.
There is no one big seller with any significant influence
on the market. All the firms in such a market are price
takers.

Assumptions:
a. The products on the market are homogeneous,
i.e. they are completely identical
b. All firms only have the motive of profit
maximization
c. There is free entry and exit from the market, i.e.
there are no barriers
d. And there is no concept of consumer
preference
2. Monopolistic Competition
In monopolistic competition, there are still a large
number of buyers as well as sellers. But they all do not
sell homogeneous products. The products are similar
but all sellers sell slightly differentiated products.
Now the consumers have the preference of choosing
one product over another. The sellers can also charge a
marginally higher price since they may enjoy some
market power. So the sellers become the price setters
to a certain extent.
3. Oligopoly
In an oligopoly, there are only a few firms in the market.
While there is no clarity about the number of firms, 3-5
dominant firms are considered the norm. So in the case
of an oligopoly, the buyers are far greater than the
sellers.
The firms in this case either compete with another to
collaborate together, they use their market influence to
set the prices and in turn maximize their profits. So the
consumers become the price takers. In an oligopoly,
there are various barriers to entry in the market, and
new firms find it difficult to establish themselves.
4. Monopoly
In a monopoly type of market structure, there is only
one seller, so a single firm will control the entire
market. It can set any price it wishes since it has all the
market power. Consumers do not have any alternative
and must pay the price set by the seller.
Economic Concepts
Monopolies are extremely undesirable. Here the
consumers loose all their power and market forces
become irrelevant.
Elasticity- it is a measure of a variable's sensitivity to a
change in another variable. In business and economics,
elasticity refers the degree to which individuals,
consumers or producers change their demand or the
amount supplied in response to price or income
changes. It is predominantly used to assess the change
in consumer demand as a result of a change in a good
or service's price.
How Elasticity Works
When the value of elasticity is greater than 1, it
suggests that the demand for the good or service is
affected by the price. A value that is less than 1 suggests
that the demand is insensitive to price.
A product is considered to be elastic if the quantity
demand of the product changes drastically when its
price increases or decreases. Conversely, a product is
considered to be inelastic if the quantity demand of the
product changes very little when its price fluctuates.
%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑚𝑡𝑖𝑡𝑦
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Companies with high elasticity ultimately compete with
other businesses on price and are required to have a
high volume of sales transactions to remain solvent.
Firms that are inelastic, on the other hand, have goods
and services that are must-haves and enjoy the luxury
of setting higher prices.
Types of elasticity
1. Price elasticity of demand (PED)
It measures the responsiveness of quantity
demanded to a change in price. PED can be
measured over a price range, called arc elasticity, or
at one point, called point elasticity.
2. Price elasticity of supply (PES)
It which measures the responsiveness of quantity
supplied to a change in price.
3. Cross elasticity of demand (XED)
 Economic Concepts
It measures responsiveness of the quantity
demanded of one good, good X, to a change in the
price of another good, good Y.

4. Income elasticity of demand (YED)

It measures the responsiveness of quantity
demanded to a change in consumer incomes.