“Its like a rollercoaster, just not as fun and you don’t get your picture taken”

Business cycles are alternating rises and declines in the level of economic activity, sometime over several years. Individual cycles (one "up" followed by one "down") vary substantially in duration and intensity. This is the representation of economic growth with periods of economic instability.

 When business activity reaches maximum (temporary)  Economy near or at full employment  Price level likely to rise  Level of real output at or very close to economy's capacity (on production possibilities curve)  Sometimes located in the area outside of the Production Possibilities Curve.  Recession needs to take place to identify the peak.

 Period of decline in total output, income, and employment  Widespread contraction of business activity  Lasts 6 months or more  Decrease in real GDP

 The bottom curve of the recession where output and employment are "bottom out" at their lowest level  Can be either short- lived or quite long  Example of long trough: Great Depression of 1930s  Can be represented by area inside the Production Possibilities Curve

 Period where real GDP, income and employment rises (approaching full employment).  The economy again approaches full employment.  Inflation will occur if spending expands more rapidly than do production capacity, prices of nearly all goods and services will rise.

Some believe it is caused by changes in productivity, while other theorists believe it is the result of momentous innovations (cotton gin, electronics). The main cause for fluctuations in the business cycle is changes in the level of total spending Major changes in productivity. When productivity expands, the economy booms; when productivity falls, the economy recedes.

Peaks are only temporary because at full employment, real output can hardly rise anymore while the spending keeps increasing. This results in inflation.

As the level of spending increases, output/employment/income increases due to: Higher profits so suppliers are likely to provide more quantity 1. Which leads to hiring more laborers 2. As the result, household's income rises As the level of spending decreases, output/employment/income decreases 1. Which leads to cutting down on employees 2. Less profits so suppliers are likely to cut production 3. As the result, household's income decreases

Firms and industries producing capital goods and consumer durables are affected most by the business cycle 1.Firms can postpone the purchase of capital goods, new equipment, and the construction of new plants 2. When recession occurs, and consumers must trim their budget, therefore, purchases of durable goods such as personal computers and automobiles will decline. Service industries and industries that produce nondurable consumer goods are somewhat insulated from the most severe effects of recession because people find it difficult to cut back on things such as clothes and food.