For a Firm to Survive It Needs to Know as Much About the Business Cycle as It Knows About Its Markets
For a firm to survive it needs to know as much about the business cycle as it knows about its markets. Discuss.
The business cycle is a sequence of economic activities typically characterized by recession, fiscal recovery, growth, and fiscal decline.
Some firms will be more vulnerable to changes in the business cycle then others, the extent of which depends on the income elasticity of demand for the firm’s products. For example the car industry and firms producing new cars will be sensitive to the GDP as the demand for the products (the new cars) is highly income elastic, in a boom period demand will increase as consumers income would have as well whereas in a recession, demand will fall as people will have less money, an example of this is the current recession, UK new car sales have fallen 11.5% in January 2011, and Toyota profits have fallen 39% however Toyota has had extra global issues after it recalled millions of cars worldwide due to faults, on the other hand competitors such as Nissan and Honda have been hit by slow demand as well and haven‘t had such issues compared to Toyota. These drops could have be anticipated or prevented if the firms had a more effective market planning and predicted the business cycle more effectively.
However it’s hard for a firm to understand the business cycle as it’s quite random and unpredictable, but is a sequence of four phases, if a firm can understand these phases; boom, recession, slump and recovery than it will be able to act in the most efficient way for the situation, for example during a boom there will be increased demand which may result in firms utilising their production capacity to the full but if a firm knows this is going to happen then it can plan to expand in time for it, another example is during a recession many business will fail so if a business and operate efficiently with cost cuts etc. then it may even emerge stronger and better. E.g. Zara, has cut costs by reducing storage to hardly anything as
The business cycle is a sequence of economic activities typically characterized by recession, fiscal recovery, growth, and fiscal decline.
Some firms will be more vulnerable to changes in the business cycle then others, the extent of which depends on the income elasticity of demand for the firm’s products. For example the car industry and firms producing new cars will be sensitive to the GDP as the demand for the products (the new cars) is highly income elastic, in a boom period demand will increase as consumers income would have as well whereas in a recession, demand will fall as people will have less money, an example of this is the current recession, UK new car sales have fallen 11.5% in January 2011, and Toyota profits have fallen 39% however Toyota has had extra global issues after it recalled millions of cars worldwide due to faults, on the other hand competitors such as Nissan and Honda have been hit by slow demand as well and haven‘t had such issues compared to Toyota. These drops could have be anticipated or prevented if the firms had a more effective market planning and predicted the business cycle more effectively.
However it’s hard for a firm to understand the business cycle as it’s quite random and unpredictable, but is a sequence of four phases, if a firm can understand these phases; boom, recession, slump and recovery than it will be able to act in the most efficient way for the situation, for example during a boom there will be increased demand which may result in firms utilising their production capacity to the full but if a firm knows this is going to happen then it can plan to expand in time for it, another example is during a recession many business will fail so if a business and operate efficiently with cost cuts etc. then it may even emerge stronger and better. E.g. Zara, has cut costs by reducing storage to hardly anything as