Define the 4 stages of the business cycle and explain why they happen.

1. RECOVERY/ UPSWING

• (recovers from slump)
• production + employment increase
• consumers spend more as more confident in the security of their employment
• no major decisions are required to meet rising demand whilst spare capacity exists (use idle resources)
• as business confidence increases, firms may invest in further fixed assets (e.g. factories)
• employees find jobs more easily + wages rise

2. BOOM

• high levels of production + expenditure by firms , consumers, goverment
• lead to prosperity + confidence in business community
• investment in fixed assets rise
• can experience pressure
• skilled workers become scarce and firms offer higher wages
• shortages occur as insufficient raw materials to meet high demand
• price rise
• combination of higher wages + rise in price of raw materials --> inflation (lead to end of boom)

3. DOWNSWING

• incomes + output start to fall
• rising prices of labour + materials increase cost of production
• business lower profits
• UK government normally raise interest rates to avoid inflation
• falling profits + rising interest rates --> delays in new plans for new factories/ offices
• production can fall and amount of spare capacity raises
• some businesses fail + level of bankruptcies rise

4. SLUMP

• production at lowest
• unemployment high
• increasing numbers of firms suffer from isolvency