Level 1 Business Studies AS90838 Demonstrate an understanding of external factors influencing a small business Economics Influences

Economic Influences Students will identify economic influences on business. Define the business cycle Discuss the impact (costs and benefits) the different stages of the business cycle have on small businesses in New Zealand

Business Cycle What Does Business Cycle Mean? The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

Business Cycle The four stages of the business cycle are: 1. growth (expansion), 2. peak, 3. recession (contraction), 4. trough At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration.

Business Cycle Definition: A business cycle is the periods of growth and decline in an economy. There are four stages in the business cycle: Recession / Contraction - When the economy starts slowing down. Trough - When the economy hits bottom, usually in a recession. Growth / Expansion - When the economy starts growing again. Peak - When the economy is in a state of "irrational exuberance."

Peak What Does Peak Mean? The highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. It is at this point that real GDP spending in an economy is its highest level.

Peak Recession Is the first part of a recessionary / contractionary phase. Consumer's confidence starts to decrease a little. People start to stop buying large items such as cars, major appliances and houses. This results in businesses starting to reduce their output of these items(inventory levels). Businesses start to decrease their hiring, they may even start to layoff some of their employees. Workers might have to take wage cuts. Resulting in prices decreasing.

Recession The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.

Recession A recession is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. The bottom of a recession is referred to as a trough A particularly severe recession is known as a depression.

What happens during a recession? What falls? 1. production, as measured by gross domestic product (GDP), 2. employment, 3. investment spending, 4. capacity utilisation, 5. household incomes and spending 6. business profits, 7. prices and inflation, 8. government revenue from tax and GST What rises? 1. bankruptcies and 2. the unemployment rate

Deep Trough A deep trough is called a slump or a depression.

Depressions A depression is a severe downturn in economic activity. These are considerably worse than recessions. Businesses struggle to make profits, forcing them to reduces wages and cut back on staff numbers. This causes unemployment rates to rise across the entire country. Work becomes much harder to find, and even people with spotless credit histories fail to make their loan repayments, leading to mass home repossessions.

Recovery Also known as an upturn, the recovery stage of the business cycle is the point at which the economy "troughs" out and starts working its way up to better financial footing. Demand for goods generally increases resulting in increased output and employment.

Growth Peak Economic growth is in essence a period of sustained expansion. Signs of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, growth periods are also generally accompanied by inflationary pressures.

Benefits for small businesses of growth and expansion Greater business confidence Businesses produce more goods Businesses invest in more machinery and assets Consumers spend more money. Increased employment, promotion opportunities and security for management and employees Increased business profit Prices tend to increase due to extra demand

Costs at different stages of the business cycle Employment: The full impact of a recession on employment may not be felt for several quarters. Research shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn.

Costs at different stages of the business cycle Business: Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti- competitive mergers, with a negative impact on the wider economy:

Costs at different stages of the business cycle Social: The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well- being.