I suppose for many years many of us have may have been watching and listening to the news and hearing experts talk about the economic cycle, but may not have fully grasped what the concept is about. Or in school, we may have been told about this concept in our economics courses but not really understand how to apply it in into our ordinary lives or in our investment journey when we have to make decisions about what to invest in. As the purpose of these articles is to combine investment decision-making with the knowledge of how economics and economic decisions and mechanisms work, it is then important to delve a step further in the field of economics and unpack what an economic cycle is as well as how it works.
What is the economic cycle?
Understanding the economic cycle can be broken down into multiple segments that deserve their own discussions, but in this particular segment we will be discussing the first phase of the economic cycle. In simple terms, this first phase is the flow of goods and services or the exchange of these goods and services between two or more economic agents*. The ways and channels in which these economic agents will be brought together will be referred to as “economic levers.”
The economic agents that will assist us in visualising and understanding the first phase of the economic cycle are:
- Consumers, and
In the context of economics, producers refer to the manufacturers of the goods that are sold in the market* or providers of the services offered in the market. A simple example of a producer of goods is a food manufacturer, and a simple example of a producer who provides services is your cell phone company which provides you with internet access and other services. Consumers, on the other hand, are the economic agents that purchase these goods and services in the market from producers. Hence, if we view the market as being the economic connection between these two agents, producers tend to supply goods and services to the markets and thus consumers tend to demand these goods and services from the market. How consumers meet their demands, namely their needs and wants, is through an economic lever known as “spending”. Through this economic lever, it enables them to engage with producers who are the manufacturers of goods or providers of services through the market.
The Economic Cycle in action
To illustrate or describe the economic flow between producers and consumers, assume that we have an ordinary household, the consumers, and a producer of fruit and vegetables, preferably a farmer. The market that will combine both the farmer and the household of consumers is a fruit and vegetables outlet, Fruit and Veg Market. Suppose the farmer plants and cultivates only tomatoes and sells each kilogram of freshly-produced tomatoes to Fruit and Veg at R5. Fruit and Veg, after purchasing these tomatoes from the farmer, will then sell the tomatoes to the household at R6 for every kilogram, and thus making a profit of R1 in the process.
The flow of goods (tomatoes) from the producer (farmer) to the consumer (household) through the market (Fruit and Veg), and the flow of the money from the consumer to the producer, through the market, is what is referred to as the economic cycle. This is of course the simplistic model of the economic diagram.
As you have seen above, you’ve already interacted with the concept of the economic cycle in your ordinary life, whether you knew it or not. And this for me is the beauty of economics, that we interact with and are influenced by economic concepts on a daily basis. Also, from above example of consumers interacting with producers through a market, you have a first glimpse into a fundamental understanding of how financial markets work as well as what they are.
See you in the next article.
- Economic agents: By economic agents we simply mean participants in an economy that interact with each other.
- Market: The definition of a market is as you might imagine it. It is simply a place where people get together for the purpose of trade by purchases and sales.
This article was written by Realeboha Molaba.
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