Causes of Business Cycles – Demand, Supply & External Shocks
Why do economies experience booms and recessions? Economists explain business cycles using demand, supply and external factors.
1. Demand-side Causes
- Changes in investment demand – optimistic expectations increase investment; pessimism reduces it.
- Changes in consumption demand – due to income, wealth, credit availability.
- Monetary policy – expansion of money supply can stimulate demand; tight policy can slow it.
2. Supply-side Causes
- Technological changes – new inventions can start expansion.
- Changes in cost of production – oil price shocks, wage changes.
- Availability of inputs – shortages of raw materials, power cuts.
3. External Shocks
- Wars and political disturbances.
- Natural disasters, pandemics.
- Global financial crises.
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4. Interaction of Factors
Often, business cycles are caused by combination of factors:
- Demand and supply changes feed into each other.
- External shocks trigger changes in expectations and investment.
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5. Quick Revision Points
- Demand-side: investment, consumption, monetary policy.
- Supply-side: technology, cost, input availability.
- External: wars, disasters, global crises.
6. Quiz Time 🎯
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