1. AS Economics and Business The economic cycle (and YED) Unit 2B
By Mrs Hilton for revisionstation

2. Lesson Objectives
At the end of today's lesson you will be able to understand what the Economic Cycle is
2. Demonstrate the impact the Economic Cycle has on businesses
Outcomes
Identify what the Economic Cycle is
Understand how it is measured
Demonstrate the various stages and the impact each stage has on a business

3. Starter: What does this mean to you?

4. The Economic Cycle
‘Fluctuations in the level of economic activity around its productive potential over a period of time’

5. The Economic Cycle
GDP
Boom
Recession
Recovery
Slump
Time

6. Key terms explained
Boom: period when an economy is growing strongly and is operating around its productive potential (pp)
Recession: A period when growth or output become negative (for two successive quarters 6 months)
Recovery: the movement back from when the economy is operating below its pp to a point where it is at its PP
Slump: A period where there is a particularly deep and long fall in output

7. The Impact on Businesses
Boom
High Prices
High Wages
High Consumer Spending
Time

8. The Impact on Businesses
Recession
Businesses look for other markets
Investments Fall
Low Profits
Redundancies
Time

9. The Impact on Businesses
Slump
More redundancies
Consistent high unemployment
Low Consumer Spending
Shops/Factories Close
Time

10. The Impact on Businesses
Recovery
Increased production
Wages rise
Unemployment declines
Consumers start to spend more
Time

11. Slump Question What is a slump?
Identify three effects that are likely to occur to a small business in the event of a slump

12. Boom Question What is a boom?
Identify three effects that are likely to occur to a small business in the event of a Boom

13. Recession Question What is a recession?
Identify three effects that are likely to occur to a small business in the event of a recession

14. Recovery question What is a recovery?
Identify three effects that are likely to occur to a small business in the event of a recovery

15. Types of goods
In a recession consumers will change their buying habits (a pattern of demand changes as income changes) if I gave you £500 now you would buy different things than if I gave you £5
There are;
Normal goods – as income increases so does demand
Inferior goods – as income increases demand decreases e.g. Bread, as incomes rise consumers switch to more expensive food. Margarine as incomes rise consumers switch to butter. Bus transport – as incomes rise consumers switch to their own car
Luxury goods – as income rises consumers may substitute items for these types of goods. In times of recession consumer demand drops

16. Income Elasticity of Demand
You decide….
Bus travel
Cigarettes
Designer clothes
Fine wines
Fresh vegetables
Frozen vegetables
Fruit juice
Instant coffee
International air travel
Luxury chocolates
Margarine
Stilton
Private education
Private health care
Stringy cheese
Rail travel
Shampoo
Tinned meat
Value “own-brand” bread

17. Income elasticity of demand – called YED
Like PED we can calculate this to see what kind of goods they are...

18. Income Elasticity of Demand
Formula
Income elasticity of demand (Yed) measures the relationship between a change in quantity demanded and a change in real income
Yed = % change in demand
% change in income

19. What do the results mean – look for the signs
More than +1 = luxury (+2, +3.5)
+0 to +1 = Normal (0.5, 1,)
Minus figures = inferior (-0.1, -2)

20. Sample question 1
A 10% increase in income will result in a 2.3% increase in demand for coffee. Calculate the YED.

21. Answer question 1
D/I
+2.3/10
=0.23
= normal good

22. Sample question 2
1. During a recession, which is the most likely to suffer a fall in sales?
A. Furniture stores
B. Supermarkets
C. Pharmacists
D. Bus companies
Explain why your answer is correct (1 + 3 marks)

23. Answer question 2 mma on next slide
Answer A Furniture
Its a luxury item
All others are necessities
Try and write a MMA to answer this question and include YED comments

24. Model answer including YED
A recession describes a time when, for two successive three-month periods, real GDP has declined.
Almost every industry will experience a decline in sales, but particularly those whose goods are considered luxuries – such as new furniture.
With their high YED, sales will fall faster than real incomes drop.
By contrast, all the other goods are necessities (and therefore with low YED), so we might expect their sales to hold up reasonably well.

25. Other types of goods to help you answer more questions
Complementary
Demand for one type of good will affect demand for another, purchase is somehow linked, petrol and cars

26. Substitute
The impact of a change in price will cause consumers to switch products to an alternative good

27. Sample question 3
Which of the following is most likely to increase the demand for DVD players?
A A fall in incomes
B A fall in the price of a substitute good
C A fall in the price of a complementary good
D A fall in the population size

28. Answer - A fall in the price of a complementary good (C)
- Complementary goods are ones that are somehow linked (1 mark) - Purchasing one will lead to the purchase of its complement (1 mark). - If DVDs fall in price more will be bought thus increasing the demand for the complementary good (DVD players) (1 mark). - The opposite will happen with substitute goods (1 mark). - The other choices will also result in reduced demand (1 mark if explained fully).

29. Sample question 4
If an increase in a consumer’s income causes the consumer to decrease the quantity demanded of baked beans, then baked beans might best be described as
A a complementary good.
B an inferior good.
C a normal good.
D a substitute good.

30. Answer question 4 • Answer is option B Inferior good
Inferior goods have a negative YED i.e. demand falls as income rises (1 mark).
• Sales of inferior goods such as baked beans are likely to decrease when incomes rise as consumers change to ‘better’ or more attractive alternatives (1 mark) e.g. organic vegetables (1 mark).
• A complementary good is one which is linked with the purchase of another good (1 mark) e.g. DVD and DVD players and baked beans are not linked to any other product (1 mark).
• A substitute good is an alternative to a product (1 mark).
• A normal good is a good for which demand increases as incomes rise (1 mark) therefore baked beans cannot be classed as a normal good if the quantity demanded decreases as incomes rise (1 mark)
4 marks