Business Cycle

Exam code: 7115

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

The business cycle describes the upturns and downturns in the level of a country’s economic activity (gross domestic product or GDP) over time
Economies do not experience consistent levels of growth over time

The growth stage is a period of increasing rates of GDP growth
- Disposable income levels rise and lead to increased demand for products
- This drives an increase in production levels, which leads to a rise in employment levels
- Businesses look to expand and increase profit

A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth
- Consumer incomes and business profits are high
- Inflation is also high due to higher demand for goods and services
- Unemployment levels are low and wages are high due to a shortage of skilled workers

A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth
- Incomes and consumer demand fall, leading to reduced output
- Consumer and business confidence tend to be low
- Business profits fall and unemployment rises

A slump is an extended period of negative GDP growth
- Unemployment is likely to be high as a result of high levels of business failure
- Significant declines in household incomes and business profits
- Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses

Businesses must adapt their strategies at each stage of the cycle
- For example, cutting costs in a recession or investing in growth during a boom

Stage of business cycle	Impact on business	Example
Growth	During the growth stage, businesses experience higher sales and profits as consumer demand increases They are likely to invest more in new products, staff, and equipment	After the 2008 financial crisis, Apple saw strong global demand for iPhones and expanded its operations worldwide
Boom	In a boom, businesses often enjoy very high sales and profits. However, they may also face rising costs due to increased wages, competition for skilled workers and the impact of inflation on materials	Tesla benefited from a booming economy in the late 2010s, with high consumer demand and strong investor confidence helping it grow rapidly
Recession	During a recession, businesses usually face falling sales and profits as consumer spending declines Many businesses reduce costs by cutting jobs or delaying investment	In the 2020 COVID-19 recession, Primark lost significant income due to store closures and reduced customer spending
Slump	A slump is the most severe stage of the business cycle, where many businesses face major losses or closure due to very low demand Investment falls, and unemployment rises sharply, reducing consumer spending	In early 2020, many airlines faced a severe slump due to global travel restrictions Passenger numbers dropped dramatically, leading to cancelled flights, redundancies, and government bailout requests

Slump and recession (low employment/high unemployment)
- Many people out of work → consumer demand falls, especially for non-essential goods
- Easier and cheaper to recruit staff (wages lower, labour supply higher)
- Risk of low staff motivation and morale if job insecurity is high
Boom and growth (high employment/low unemployment)
- More people in work → consumer demand and sales rise
- Harder to recruit staff (skills shortages, competition)
- Wages may rise, increasing business costs

Slump and recession (low inflation or even deflation)
- Falling prices may encourage consumers to delay spending, reducing sales
- Lower inflation = more stable costs, easier planning for businesses
- Risk of squeezed revenue if prices cannot be maintained
Boom and growth (higher inflation likely)
- Rising costs of raw materials and wages reduce profit margins
- Businesses may need to raise prices, but risk losing customers
- Uncertainty in pricing makes planning and forecasting difficult

Slump and recession (low/negative growth)
- Consumer incomes fall → lower demand, especially for luxury or non-essential goods
- Businesses may cut investment, delay expansion, or make redundancies
- Some opportunities for “inferior goods” (low-cost options) as consumers switch to cheaper products
Boom and growth (high/positive growth)
- Rising incomes → strong demand for goods and services
- More opportunities to expand, innovate, and increase profits
- Risk of higher costs (wages, rent, raw materials) as demand outstrips supply

Stages of the business cycle