Some years, it seems everyone is hiring, stores are busy and people are buying new cars. Other years, businesses lay off workers and families cut back. These ups and downs are normal; the economy moves in waves. A business owner who understands the wave can prepare: save money in good times, cut costs before a slowdown, and be ready to grow when things recover. In this lesson you will also see that some businesses have dozens of competitors while others have almost none, and that makes a big difference to how they set prices.
The five phases of the business cycle
The business cycle (or economic cycle) is the pattern of rises and falls in a country's economic activity over time. Economists measure activity using gross domestic product (GDP), the total value of all goods and services produced in a country in a year. When GDP grows, the economy is expanding; when it shrinks, the economy is contracting.
| Phase | What is happening | How a business might respond |
|---|---|---|
| Expansion | GDP grows, jobs are plentiful, people spend more | Hire staff, add products, open a new location |
| Peak | Activity is at its highest; prices often rise quickly | Build up savings, avoid taking on too much debt |
| Contraction (recession) | GDP falls, layoffs rise, people cut back on wants | Cut costs, focus on best-selling products, offer value deals |
| Trough | The lowest point; unemployment is highest | Protect cash, keep loyal customers, plan for recovery |
| Recovery | GDP starts growing again, hiring returns | Rehire, restock, invest carefully in growth |
Inflation and interest rates
Inflation is a general rise in prices over time, which means each dollar buys less. If a basket of groceries cost $200 last year and the same basket costs $206 this year, prices rose by $6, and . An interest rate is the price of borrowing money, shown as a percentage per year. A business that borrows $10,000 for one year at 5% interest pays in interest.
The Bank of Canada is Canada's central bank. It aims to keep inflation low and steady, with a target of 2% a year. Its main tool is its policy interest rate, which affects the interest rates banks charge on loans and mortgages. When inflation is too high, the Bank of Canada raises its policy rate. Borrowing becomes more expensive, so people and businesses borrow and spend less, and price increases slow down. When the economy is weak, the Bank lowers its policy rate, making borrowing cheaper to encourage spending and hiring.
- Loans and mortgages cost more
- People and businesses borrow and spend less
- Slows inflation
- A business may delay buying new equipment
- Loans and mortgages cost less
- People and businesses borrow and spend more
- Helps a weak economy grow
- A good time for a business to borrow to expand
When market forces hit people they cannot control
Market forces are the pressures of supply, demand and competition that move prices and jobs. Many groups in Canada have been affected by these forces through no fault of their own. When a large factory in a one-industry town closes because its products can be made more cheaply elsewhere, hundreds of workers lose jobs at once, and local shops and restaurants lose customers too. Farmers can lose a year's income when a drought cuts their crop or when the world price of what they grow suddenly drops. Small, independent retailers have struggled to compete with large online sellers that offer low prices and fast delivery. Communities whose jobs depend on natural resources, including many First Nations, Métis and Inuit communities near mines, forests or oil and gas projects, can see work and revenue rise and fall as world resource prices swing up and down. None of these groups caused the change. Common responses include retraining programs for laid-off workers, employment insurance, crop insurance for farmers, small shops moving online or competing on personal service, and communities building a wider mix of local businesses so one industry is not everything.
The four market structures
A market structure describes how many businesses compete in a market and how different their products are. The fewer the competitors, the more control a business has over its price. Market share is the percentage of all sales in a market that one business makes: A business with a large market share has more power to set prices.
| Structure | Number of sellers | Products | Control over price | Canadian-style example |
|---|---|---|---|---|
| Perfect competition | Very many | Identical | None: each seller takes the market price | Many farmers selling the same kind of wheat or corn |
| Monopolistic competition | Many | Similar but different (brand, style, location) | Some | Pizza shops, hair salons, sneaker brands |
| Oligopoly | A few large firms | Similar or different | A lot; firms watch each other closely | Cellphone carriers, airlines, large banks |
| Monopoly | One | No close substitute | Great; often regulated by government | The local water utility; the company that runs the power lines to your street |
