Managerial Economics - Business Cycle
Theories On Business Cycle
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Depending on climatic changes agricultural products are produced.
Theories
On Business Cycle:
1. Sunspot theory / climate theory: depending on climatic changes agricultural products are produced. Based on the production other ancillary units will function therefore the base for any change in economic activity of the country is climate.
2. Psychological theory: during depression or crisis of any business organization it is completely based on the psychology of the entrepreneur as to whether the organization can be revived or shut down.
3. Monetary theory: means the demand and supply of money is the primary reason for economic fluctuations of a country.
4. Over investment theory: if the organizations and individuals save more and invest a huge amount then their expectations on increase in their returns.
5. Over savings/ under consumption theory: As per this theory the increase in savings and investment will bring down the consumption which will reduce the demand for goods in the market.
6. Innovation theory: According to this theory more innovations lead to new technology and new business that leads to prosperity in the economy.
There are two types of business cycle models, they are (i) Exogenous model; due to economic shocks like war. (ii) Endogenous model; trade cycle because of factors which lie within the economic system.
A monetarist explanation: business cycles are essentially monetary phenomena caused by changes in the money supply. Change in money supply leads to change in employment and national income which increases the price. The path to an increased price level is cyclical. The link between changes in money supply and changes in income is known as the
transmission mechanism.
1. Sunspot theory / climate theory: depending on climatic changes agricultural products are produced. Based on the production other ancillary units will function therefore the base for any change in economic activity of the country is climate.
2. Psychological theory: during depression or crisis of any business organization it is completely based on the psychology of the entrepreneur as to whether the organization can be revived or shut down.
3. Monetary theory: means the demand and supply of money is the primary reason for economic fluctuations of a country.
4. Over investment theory: if the organizations and individuals save more and invest a huge amount then their expectations on increase in their returns.
5. Over savings/ under consumption theory: As per this theory the increase in savings and investment will bring down the consumption which will reduce the demand for goods in the market.
6. Innovation theory: According to this theory more innovations lead to new technology and new business that leads to prosperity in the economy.
There are two types of business cycle models, they are (i) Exogenous model; due to economic shocks like war. (ii) Endogenous model; trade cycle because of factors which lie within the economic system.
A monetarist explanation: business cycles are essentially monetary phenomena caused by changes in the money supply. Change in money supply leads to change in employment and national income which increases the price. The path to an increased price level is cyclical. The link between changes in money supply and changes in income is known as the
transmission mechanism.
Tags : Managerial Economics - Business Cycle
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