The cyclical system of economics: from supply and demand to global impact

Economics is not an isolated abstract concept; it is a dynamic system in which everyone participates and influences every day. From the coffee you buy in the morning to your company’s investment decisions, all these actions converge into a powerful force that drives the world forward. Economics determines the prices of goods and services, the level of employment opportunities, the prosperity of nations, and the development direction of businesses. While the importance of economics is self-evident, many still consider it complex and mysterious, difficult to understand its internal mechanisms.

Understanding the Basic Framework of Economics

At its core, economics is a complete system integrating production, sales, procurement, distribution, and consumption. It functions like a flowing river, with each participant being a stream within it. Whether individuals, small groups, businesses, or governments, everyone plays an important role in this system. A company produces products and sources raw materials from another company; these raw materials are transformed into finished goods; the finished products are passed to third parties for processing or branding; finally, they reach the end consumers. Each stage is influenced by market supply and demand, and any change in one link can trigger a chain reaction like dominoes falling.

Participants and Structural Layers of Economics

Anyone spending money to buy goods is participating in the economy. Similarly, those involved in producing and selling goods are also part of the economy. In fact, from individuals and small groups to enterprises, governments, and entire nations, all are participants in this large system. This system is typically divided into three layers, each with its own functions:

Layer One: Resource Extraction
This involves industries that directly extract resources from nature. Mining, agriculture, forestry, and similar sectors belong here. The raw materials produced by these industries form the foundation for the next layer.

Layer Two: Processing and Transformation
In this layer, raw materials are processed into finished or intermediate products. Some products are sold directly to consumers, while others serve as components for more complex products and continue to the next stage. This layer is crucial for increasing product value.

Layer Three: Service Distribution
This includes retail, distribution, advertising, and other service industries. This layer ensures products reach the final users and enhances user experience through value-added services.

Cyclical Patterns of Economic Operation

To truly understand how the economy works, policymakers, economists, and businesspeople need to grasp the cyclical nature of economic movements. This understanding is equally important for ordinary people, as everyone is affected by economic cycles. Recognizing these patterns can help us make smarter financial decisions, anticipate market trends, and even participate in shaping financial landscapes.

Economies follow a basic cycle: starting from a growth phase, reaching a peak, then entering a recession, and finally hitting a trough. This cycle repeats continuously, forming an eternal waveform.

The Four Key Stages of the Economic Cycle

Expansion: Hope and Growth
This is the initial phase of the cycle, characterized by vibrant markets and high optimism. It often occurs after an economic crisis, bringing new hope to all participants. Demand for goods increases, stock prices rise, and unemployment falls. Production, trade, investment, and consumption all expand, reinforcing each other in a virtuous cycle.

Peak: Saturation and Stagnation
The economy reaches maximum capacity utilization. Although growth continues, its pace begins to slow. Prices of goods and services stop rising, sales show signs of stagnation, and small to medium enterprises gradually disappear through mergers and acquisitions. Interestingly, while market participants appear optimistic on the surface, their internal expectations have turned negative. This stage marks the apex of economic growth.

Recession: Expectation Reversal
Negative expectations formed at the peak begin to manifest. Costs suddenly rise, demand sharply declines. Companies face profit compression. Stock prices start to fall, unemployment rises, some jobs become part-time, and incomes generally decline. Consumer spending contracts sharply, and investment nearly halts. This phase causes significant negative impacts on the entire economy.

Trough: Crisis and Rebirth
This is the final stage, where despite some positive signals, market participants remain pessimistic. The trough often coincides with an economic crisis. Companies struggle, equity values plummet, borrowing costs increase, and many face bankruptcy. Currency devalues, unemployment soars, stock prices hit bottom, and investment essentially disappears.

Three Types of Economic Cycles

Although these four stages typically occur, their durations vary greatly. Economists classify economic cycles into three distinct types:

Short Cycle: Seasonal Fluctuations
The shortest economic fluctuations, usually lasting only a few months. Despite their brevity, they can significantly impact the economy. Features include seasonal demand changes, shocks to specific industries, and high predictability.

Medium Cycle: Supply and Demand Imbalance
These fluctuations usually span several years. They originate from mismatches between supply and demand. Due to information lags, problems are often only recognized after deterioration. This cycle has the greatest impact on the overall economy, with recovery taking years. It is characterized by high unpredictability, uneven amplitude, and can trigger severe economic crises.

Long Cycle: Structural Changes
The longest economic cycles, typically spanning decades. Usually triggered by technological and social innovations. These cycles last across generations and cannot be offset by reserves or accumulation. Although they can lead to widespread poverty and severe unemployment, subsequent technological progress often brings waves of innovation and economic growth.

Key Drivers Shaping the Economy

The economy is influenced by dozens, even hundreds, of factors. Some have strong influence, others less so, but all play a role. Every individual purchase increases demand for certain goods; at the macro level, government policies can profoundly impact the entire country’s economic trajectory. The most important influencing factors include:

Government Policy Leverage
Through various policy tools, governments can significantly influence economic development. Fiscal policy allows governments to decide on taxation and spending. Monetary policy, implemented by central banks, influences the economy by regulating money supply and credit. Using these tools, governments can stimulate sluggish economies or curb overheating demand.

The Double-Edged Sword of Interest Rates
Interest rates are the cost of borrowing and have a major impact on consumer spending and business investment. In developed countries, borrowing is a common economic activity—people take loans to start businesses, buy homes, cars, or pay off student debt. Lower interest rates make borrowing cheaper, encouraging more consumption and driving economic growth. Conversely, rising interest rates suppress borrowing, slowing economic growth.

Global Trade Chain Reactions
International trade is another key factor affecting the economy. When two countries have complementary resource endowments, they can both benefit from trade. However, trade also has downsides, such as reducing employment opportunities in certain industries. It is a double-edged sword, creating opportunities but also challenges.

Two Perspectives on the Economy

Economics can be analyzed from two different scales:

Micro Perspective: Detailed Operations
Microeconomics focuses on the interaction of supply and demand, and other factors influencing prices. It studies how gross domestic product (GDP) affects micro indicators like unemployment. It also analyzes specific markets and parts of the economy.

Macro Perspective: Overall Movement
Macroeconomics examines these forces from a broader perspective, analyzing their widespread impacts. While microeconomics studies consumer, worker, and business behavior, macroeconomics focuses on the entire country and international economy. It investigates overall domestic consumption, trade balances, exchange rates, national unemployment, and inflation. Essentially, macroeconomics deals with the dynamics of the global economy.

Unraveling the Complexity of Economics

Simply saying “economics is complex” cannot fully express its profound significance. Economics is an active, ever-evolving force that determines the prosperity of any society and even the entire world. In this article, we reveal the intricate interconnectedness of economic systems. However, there is still endless knowledge waiting for us to explore and learn about economics.