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.
