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Finance

What Are the Phases of the Business Cycle?

Kristie Lorette
By Kristie Lorette
Updated May 17, 2024
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The four phases of the business cycle are prosperity, recession, depression and recovery. Businesses typically go through one of these the four phases of the business cycle from the time the business starts throughout its lifetime and until it sells or closes. Depending on the business, the cycle may start over again, or some businesses may get stuck in specific phases of the cycle.

During the prosperity phase of the business cycle, the business is at its highest output and highest income. During this phase, there is a high demand for the product the business produces and the business is putting out as many products as it can to meet, and may even exceed the demand of the customers. Because there is such a high demand for the products in the first of the four phases of the business cycle, when the economy or business is in this phase, employment rates and income rates are also high.

As the prosperity phase winds down, the next of the phases of the business cycle is the recession phase. At this point of the business cycle, the demand for the product is no longer as high. In fact, the demand for the product is decreasing. Because there is a decrease in demand, there is a decrease in the production of the product. A reduction in the production also requires fewer employees, so this phase also sees a decrease in the employment rate, or an increase in the unemployment rate, a decrease of profits and incomes.

When the recession phase continues for an extended time, the third of the phases of the business cycle kicks in. This is the depression phase. During this phase, there continues to be more a continuous decline in the demand for the product, a demand for workers and an underutilization of the people and material resources that are available to produce the product.

The final of the four phases of the business cycle is the recovery phase. This phase begins when a business hits a trough in business and starts to see an incline in the demand for the product demand for the product starts to increase and typically increases more and more over time. An increased demand then requires an increase in materials, people and other resources to meet the increase in demand. Ultimately, in the recovery phase, the business comes back from losing money to being profitable once again.

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Discussion Comments

By SarahGen — On Jan 26, 2014

Businesses can actually survive recession periods of the business cycle by reducing their costs and improving efficiency. It might be necessary to let some employees go during this time. But there are other methods to reduce cost as well. Such as training more people to do more jobs to improve productivity and efficiency. It's a good idea to reduce debt if possible. Changing to less costly equipment is also effective.

My dad has a small business and he followed these tips to get through the recession. He actually did very well for himself, so it's not impossible to survive the business cycle. Well managed businesses make it.

By serenesurface — On Jan 26, 2014

This sound terrible. How do business survive this awful cycle?

By donasmrs — On Jan 25, 2014

It's not just businesses that go through the business cycle. The economy goes through the business cycle as well.

Most people don't realize that the economy naturally goes through cycles of growth and recession. I used to think that government policies lead to recession but that's not entirely true.

An economy first grows, it grows until it reaches a peak. At this point, growth and demand are so high that supply cannot keep up with it. This causes the inflation to sky-rocket and many other issues follow. National currency will lose value, people will lose their jobs and trade will decrease. This continues until the recession hits a trough or the lowest point. After this, the economy starts going back up again. Things improve until the economy once again grows and reaches a peak.

This cycle continues unless the government intervenes with policies to prevent a recession and pull back the economy into a boom.

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