Analysis of the Business Cycle

There are many questions currently surrounding the economic state of the United States. Consumers, business owners, corporate management and government alike are asking questions like “Is the current economy in the business cycle in an expansion or recession?” and “If the economy is in an expansion cycle how will it affect the company in terms of sales and cost of production?” as well as “If the economy is in a recession how will it affect our company in terms or sales and cost of production?” A discussion of such factors like the real gross domestic product, inflation, and unemployment levels can help to answer some of the questions surrounding the current state of the economic cycle in the United States.

Expansion Cycle, Sales and Costs

The expansion cycle is a period when business activity surges and gross domestic product expands until it reaches a peak. As defined by the National Bureau of Economic Research, the expansion cycle begins after the trough or lowest point (NBER, 2011). Company sales will continue to increase as long as the economy is in the expansion cycle. The cost of production tends to decrease in the expansion cycle because when sales increase cost per unit to produce decreases. Due to monopolistic competition during an expansion cycle, there are many producers selling product, many buyers and every firm tries to differentiate their product in order to increase sales. The monopolistic competition keeps the production cost down because of the ease to enter the market and the volume of competing prices. Unemployment in thwarted and decreases because of the high volume demand and the need for labor to produce products. As a result of an expansion cycle, gross domestic product goes up, inflation increases at a moderate level and unemployment is down.

Recession Cycle, Sales and Costs

A recession is defined as two consecutive quarters of negative growth in gross domestic product. As defined by the National Bureau of Economic Research, the recession cycle is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales (NBER, 2011). In the recession cycle a company will see a decline in sales and an increase in cost of production. As sales decline the company will cut back on hiring employees or freeze hiring altogether. In an effort to cut cost and improve profits, the company will stop buying new equipment, curtail research and marketing efforts and stop new product development. These cost-cutting efforts will negatively impact other businesses, both big and small, which provide goods and services to the company. Because of the monopolistic competition concept, in order to stay competitive in the market, companies can not just increase their retail sales prices to cover rising production