Depression in the Business Cycle

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The business cycle is a set of expansions and contractions that naturally occur in an economic market. While movements in the business cycle generally occur because of shifts in consumer behavior, resource availability and production output, changes in a country’s fiscal or monetary policy can create movements in the business cycle as well.

Identification

A depression is a prolonged economic downturn, which often begins with two consecutive quarters of negative gross national product growth. In the business cycle, depressions are at the bottom of the contraction period. The length of the depression will vary depending on economic conditions.

Features

The business cycle will often dictate when companies can expect to make profits through selling goods and services. During expansion, profits are often highest due to high demand for goods and services. At the plateau stage, profits level off before decreasing as the economic market enters a recession and then a depression.

Considerations

Certain companies will tend to struggle more during a depression in the business cycle. For example, companies with large amounts of fixed costs—such as manufacturing or production businesses—will have fixed costs they must pay regardless of current profit levels.

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