Demand and production fluctuations lead to changes in rates of consumption and production capacity. These periodic variations impact on economic activity levels within a market economy, and are analyzed by economic theories.
Different methods are employed to derive some benefit from such observations, as regards regular flow patterns of a business cycle especially its upper and lower reversal points.
In contrast, growth theory considers the long-term trend of growth of an economy. To view the business cycle, it must therefore be abstracted from the underlying growth trend. The analysis overlaps with part of the employment theory.
Business cycles are often distinguished as upswings (expansion), downturns (recession) and also depression. Policy measures to mitigate economic fluctuations are referred to as economic policy.
Such fluctuations are usually evaluated employing the growth rate of real gross domestic product (GDP). Despite being termed cycles, most of these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.
The boom phase takes effect due to strong demand, thus enhancing the capacity of an economy to operate at full strength. And such a phase is synonymous with full employment, wage increases, the prices boost consumer activity, and the economy in general tends to respond positively.
Production levels pick up, while interest rates may be raised due to increased demand for loans and bad investments inspired by excessively optimistic economic expectations. This has the capacity to lead to market saturation, and the characteristics of a saturated market include market volume increases, sub-markets covered by stagnation or shrinkage.
Business acquisitions strengthen concentration and consolidation processes and polypolistic market structures are replaced by oligopolistic structures. Theoretically, the major cause of economic cycles involves the credit cycle: the growth of private credit generates economic expansion. And the opposite results in recession or worse – depression.
There are many economic theories relating to business cycles, within mainstream economics such as the Real Business Cycle theory and other credit linked accounts which include debt deflation and the financial instability hypothesis.
The actual economic state of an economy is determined by various methods. Firstly, a time series analysis should be performed with certain macroeconomic variables such as GDP, national income, consumption and investment will be used.
Seasonal fluctuations are short term (approximately three months) and relatively easy to predict. Cyclical fluctuations are medium-term in nature (about four years). They are more difficult to get a grasp and are the typical task of economic policy. They come about as a result of imbalances between aggregate demand and aggregate supply, which are further influenced by temporal adjustment delays.
Structural changes are long term in nature (about 50-60 years). They are triggered by profound changes in the economy (innovation in key technologies) and have a great impact on the labor market. This policy may be difficult to intervene creatively.