Explain The Four Phases Of Business Cycle

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Understanding business cycles is the essence of a course in macroeconomics. The term business cycle is an economy cycle also known as trade cycle which refers to aggregate production. It refers the periodic but irregular upward and downward activity over several months or years in the market economy. In another word we can say that ‘A business cycle occurs due to the fluctuations that an economy experiences over time resulting from changes in economic growth.’ A business cycle is typically characterized by four phases—Expansion or prosperity, recession, depression and recovery—that repeat themselves over time.
Here I am showing the diagram of four phases of business cycle - The business cycle starts from the lower point and passes through
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When there is an expansion of output, income, employment, prices and profits. It starts from equilibrium position, because of increase in demands the demand for raw material also increase and there is increase in investment because demand for consumption goods increased. There is also rise in standard of living. We can see the position of the prosperity on the above graph.

2. Recession
It is the turning period from prosperity to depression. It is a phase of reduced economy activity, when demand for consumer goods starts falling the overproduction and future investments are given up. In this period levels of buying, selling, production, employment, profit and income typically diminish. Most of the time this phase lasts for a short period but when it is sever it is considered as crisis.

3. Depression
It is also referred as contraction. There is a continuous decline of output, income, profits and falls in production and employment throughout the economy. But there is not an equal decline in all sectors. There is more decline in demand for machines and equipment than fall in demand for consumer goods. This phase basically marks the end of the period of growth in business
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Here we should not be confused by the terms ‘invention and innovation’. Invention is like discoveries of something new but the term innovation is the application form states inventions to actual production. However, in way of economic term innovation means the commercial application of inventions such as new techniques of production, new methods of organization etc. Advocates of a free market might be attracted by this theory because it emphasizes enormous innovative power in
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