August 9, 2022

Peter DeCaprio: Why is the business cycle important in economics?

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The business cycle is important in economics because it explains supply and demand of goods throughout the market. 

In the long run, the supply of a good is determined by its marginal cost. In microeconomics, consumers and producers negotiate on price until they reach a sustainable level for both sides. The business cycle, however, takes place on a much shorter time frame where there is no negotiation or stable equilibrium. The market will either be over or under-supplied as the demand of a good outstrips its supply at any given moment. 

According to Peter DeCaprio the cycle can help you predict how prices of certain goods will change through time since their demand changes every day. You also need to consider that every product has an optimal quantity that should be sold in order to maximize profit because consumers don’t buy everything produced. For example, if you produce 1 million widgets, even if every person in the world bought one it would still be unprofitable because you could’ve produced other products instead for more profit.

What is the difference between expansion, growth, prosperity and boom?

Expansion: 

The part of the business cycle where economic growth is faster than usual. 

Growth: 

A period when an economy is growing in size or value. It doesn’t necessary mean that this has to do with the business cycle. For example, a country can grow its GDP by following policies that promote sustainable practices without necessarily being in a certain part of the business cycle. 

Prosperity: 

The state of having great wealth or much property. 

Boom: 

An instance when something is increasing in value at a very high rate. 

FAQs:

How do we measure how long a recovery period is?

We use measuring points such as time after the trough, GDP growth, and employment rates to determine how long a recovery period is. 

What are three phases of a business cycle?

The three phases of a business cycle are the trough, the expansion, and the peak. 

What is an example of a leading indicator in economics?

A leading indicator would be something that indicates what will happen in the future before it actually happens. 

Why do we need to know about unemployment rates in economics?

We need to know about unemployment rates so we can prepare for future needs such as increased spending on certain things. 

If the economy is doing poorly but employment rates are done increasing, does it mean that workers have been laid off from being employed?

It doesn’t necessarily mean they have been layed off from being employed but rather more people were entering into the job market than leaving which causes the unemployment rate to rise. 

What is a lagging indicator in economics?

A lagging indicator would be used after effects of an event have occurred and then we look back and see what is going on. 

What does GDP growth per capita mean when it’s said together in one phrase?

GDP growth per capita means how much money is being earned per person throughout the entire country. 

What are indicators that show if a recovery period from a recession has ended?

Indicators that show when the recovery period from a recession has ended are time after the trough, GDP growth, or employment rates. 

Why do some countries have negative interest rates?

Some countries have negative interest rates because it’s a way for them to fix their economy and increase economic growth. 

How are people are paid when the economy is doing well?

People are generally paid more often when the economy is doing well because there are more jobs available but they will have to be better qualified for it. 

What would cause the business cycle in an economy to become unstable?

An unstable business cycle could occur if government spending becomes too high or too low which would have a major impact on the entire country’s GDP. 

Why do building new homes rise during economic expansions?

New homes rise during economic expansions because it means there is more funding being put into construction which causes demand of housing to rise again. 

What are three factors that can cause inflation rates to go up?

Some factors that can cause inflation rates to go up are raising prices of goods, loss in purchasing power from the money being used to pay for the goods, and an increase in demand. 

Conclusion by Peter DeCaprio:

It’s important to understand what occurs during different parts of the business cycle so we can prepare for future needs. Wise investments are necessary when it comes to economic growth so we know what to focus on working towards in the future. 

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