1. 1.5.4 How do business cycles affect small businesses?
Each member of the class has to hold out their right hand in which they should be holding zero, one, two or three coins. Fists should be closed.
Each member of the class, going in a clockwise direction, then guesses how many coins there are in total.
No member of the class can choose the same number.
Each member opens their fist, one at a time, and the coins are counted up.
The winner is the class member who gets closest.
1.5.4 How do business cycles affect small businesses?
1.5.4 Business Cycles

2. Business Cycles There are four main stages to the Business Cycle:
The level of economic activity fluctuates over time, this pattern is referred to as the business cycle
Economic activity is measured by GDP (Gross Domestic Product)
GDP is the total value of a country’s output in a year
Real GDP takes into account inflation. If GDP growth is 5% and inflation 2% real GDP growth will be 3%.
There are four main stages to the Business Cycle:
Trend rate of economic growth
Real GDP
Boom
Recovery
Recession
Slump
1.5.4 Business Cycles
Time 2

3. Business Cycle - Boom A period of high levels of economic activity
Characterised by:
High rate of economic growth
High demand
Low unemployment
Rising prices
Labour skills shortages
High confidence in the economy
Capital Investment is high
1.5.4 Business Cycles 3

4. Business Cycle – Boom impact on small business
Firms struggle to find skilled workers
Businesses are close to full capacity with little chance of producing more if required
Demand is more price inelastic - price becomes less significant
Quality will be seen as more attractive
More difficult to retain staff as firms compete for workers – wages are bid up
1.5.4 Business Cycles 4

5. Business Cycle - Recession
The rate of economic growth starts to fall in a downturn
If real GDP falls for 6 months then this is known as a recession
Characterised by:
Demand falls
Unemployment begins to rise
Some firms will go out of business
Confidence in the economy is low and most firms will reduce investment
UK in recession 2012
1979 saw the start of Britain’s decline into a recession – mirrored in the music of the day
Ghost Town The Specials
The Government state that recession is officially two quarters of negative economic growth. However, it is often regarded as a period of low economic growth.
1.5.4 Business Cycles 5

6. Business Cycle – Recession impact on small business
Firms will rationalise – laying off workers and reducing capacity
Cost minimisation will become a key factor
Demand is more price elastic - price becomes more significant
‘Value for money’ will be seen as more attractive
Staff fear for their jobs and motivation will be affected
1.5.4 Business Cycles 6

7. Business Cycle - Slump
The bottom of the business cycle which represents a period of serious economic decline
Characterised by:
Low or negative growth
Demand and inflation are low
Unemployment is high
Confidence in the economy is low
High rate of bankruptcy
1.5.4 Business Cycles 7

8. Business Cycle – Slump impact on small business
Many firms have gone out of business – less competition for those who survive
Many more are fighting for survival
Price is pre-eminent for many firms
However, less competition leads to monopoly and fewer firms in markets
Wage costs are lower as too many workers vie for too few jobs
1.5.4 Business Cycles 8

9. Business Cycle - Recovery
When there are signs that economic growth is starting to rise, often referred to as the ‘green shoots of recovery’
Economic growth starts to rise
Demand increases
Unemployment falls
Inflation starts to rise
Confidence in the economy increases
Capital Investment increases
Is the service sector heading for recovery?
1.5.4 Business Cycles 9

10. Business Cycle – Recovery impact on small business
Firms will take on more workers
Capacity utilisation increases
Investment in all areas starts to increase
Price begins to be a less important factor
1.5.4 Business Cycles 10

11. Evaluating strategies that small businesses might deploy in response to changes in the business cycle
Recovery/Boom
Increase capacity utilisation – can the firm afford to take on new workers and increase production? This will depend on other factors such as the finance available, particularly in the short-run
Increase capacity – can the firm afford to invest in capital equipment? This will require longer term sources of finance. Current bank loans will be a significant issue here
Target new markets – the firm might develop new products with a high e.g. luxury goods and aim at new markets e.g. those with higher incomes
Increase price – as the economy grows price become less important to customers
1.5.4 Business Cycles 11

12. Evaluating strategies that small businesses might deploy in response to changes in the business cycle
Recession/Slump
Cut capacity – there is an opportunity cost involved. Will the recession be short lived? Once changes have been made they are often difficult to reverse
Lay off workers – this can cause demotivation and initial cash flow problems with high redundancy costs
Target new markets – for example, those on lower incomes with cheaper products
Reduce price – this could lead to price wars where only the consumer benefits. Not everyone suffers in a recession!
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13. MULTIPLE CHOICE
1. What would be the two most likely effects on a small business of a recession?
□ A It will increase the supply of its products
□ B A higher exchange rate will mean it exports less
□ C Demand for its products will fall
□ D The rate of interest that it pays will fall
□ E Less unemployed will buy more of its products
C, D
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