Changes in total demand and supply

Total demand is the total demand for goods and services produced locally. Total supply is the total quantity of goods and services in the economy that local businesses are willing to sell at certain prices.

During the downswing of the business cycle there is a decrease in total expenditure (total demand) and businesses reduce production – total supply becomes smaller. During the upswing of the business cycle there is an increase in total expenditure (total demand) and businesses increase their levels of production.

Changes in the economic growth rate

Changes in the economic growth rate have important consequences for the economy.

With the downswing, production first decreases slowly, then faster, and closer to the lower turning point production decreases more slowly again. With the upswing, production first increases slowly and as the peak is reached, the rate of production increases faster.

An increase in economic growth is important because it creates more job opportunities, more tax is paid and the government can then provide more services, and consumers can buy more goods and services and thereby enjoy a higher standard of living.

Changes in employment

With the downswing, production and consequently employment decrease. As the recession increases, even more people lose their jobs. Unemployment levels are very high during the depression.

With the upswing, employment initially increases slowly. It is at the highest levels during the prosperity phase. Full employment is achieved by professional people, and there is always a degree of unemployment among unskilled and low-skilled workers.

Changes in price levels

As the prosperity phase progresses, there is an increase in demand and a shortage of goods. Traders then increase their prices and this promotes inflation. As the recession increases, prices rise at a slower rate and inflation begins to decline. In a deep recession and depression, prices will decrease, causing demand to increase.

Changes in exchange rates

The exchange rate is the rate at which one country’s currency exchanges for other countries’ currencies.

During the downswing phase, imports and foreign investment decrease and then the demand for the currency decreases and the price of the currency falls.

During the upswing phase, imports and foreign investment increase, which causes the demand for the currency to increase in terms of other currencies.

Influence on economically vulnerable people

Economically vulnerable people are people who find it difficult to get work because they do not have suitable training, are unskilled, are disabled or are old.

During the downswing phase, there are fewer job opportunities and vulnerable people are directly affected, and the state has less to spend on welfare services.

During the upswing phase, more job opportunities are available and economically vulnerable people can then find work, and the state is better able to provide welfare services.