Business Cycles: Why They Exist
The economy, the stock market and each sector, industry and business all go through cycles of their own. What goes up must come down and vice versa. As an investor, understanding why cycles occur will help you to look at stock prices with an additional perspective. One of the major reasons business cycles exist is because of a very fundamental fact: For physical goods, Supply cannot adjust to Demand instantly. Suppose for example, that there is a sudden surge in demand for a hypothetical brand of shoes called 'Royal Glamour'. At the shoe store level, the stock of shoes will run out and the store will call the shoemaker. The shoemaker will then need to make more shoes and order more leather for that. The leather maker will need to order more hides, the hide supplier will have to kill more cows. And when there are no more cows to kill, they will have to wait till cows reproduce and the calves grow up. In our hypothetical example, Demand for Royal Glamour shoes may have suddenly s...