1) Analysing the economic cycle.
An economic cycle is a type of time line spanning from around 4 – 12 years that displays the changes in economic activity by comparing the current trends with a typical trend line of sustained economic growth. Essentially, the economy could be performing at 4 stages; boom, peak level, recession, trough level, and recovery. The performance of businesses and the economy can be judged by looking at where we are and were at on the economic cycle, and from this we can predict what future performances will be.
For example, if the economy is currently experiencing a massive boom, and economic growth is at an all-time high (peak), we can predict that there will soon be dip in this performance, possibly leading to a recession. This is because high levels of economic growth are not sustainable in the long term. Similarly, a period of recovery can be expected when real GDP begins to grow after a recession or periods of negative or low economic growth. Although both these examples represent the extreme stages of the economy, it is still useful to use economic cycle to predict future performance of the economy.
2) Learning the importance of speculation.
Businesses, economists, the government, and the media are always making predictions about our economic and business future. We often see articles run in newspapers or features shown on television saying things like “Inflation to rise next year”, “XXXX prices expected to increase”, and so on.
When enough people think the price of something is going to rise, they will force up the price of said item. Say a newspaper article ran today saying it is expected that computers are going to become more expensive, odds are that more people will go out today and buy computers in order to avoid the expected future rise in prices.
However, this sudden increase in demand for computers forces up the price in order to eliminate the excess demand that has been created. Therefore, the speculation that the prices of computers will rise has itself caused the prices of computers to rise. Manipulating and inferring the scale of speculation is important in predicting future prices which related to inflation and the performance of individual businesses (prices of items) and the economy as a whole (inflation).
3) Understanding how businesses increase their monopoly power.
When businesses possess a lot of monopoly power, they dominate the market that they are a part of. This means that smaller firms find it harder to stay in the market and in some cases may be pushed out altogether.
A competitive market is one where there are lots of business operating in the market and where there are little barriers to more businesses entering or leaving the market. If all of a sudden, a firm in the hair dye market increases their advertising on a large scale, it can be expected that this business will experience an increase in their monopoly power. Lots of predictions can be made from this.
As this business becomes more well known, it could temporarily lower their prices to increase their market share. This paired with their large advertising, it can be predicted that smaller firms will be driven out of the market if they can’t compete with the larger business as it is unlikely that they will be able to increase their advertising and lower their prices. This makes the market more concentrated, with the large business dominating. From this, we can predict that this firm could exercise its monopoly power by increasing prices for hair dye, which customers will have to accept as there is no longer a massive market for hair dye.
4) Taking things with a pinch of salt.
A slightly contradicting final point is something that should be obvious anyway, and that is we cannot accurately predict everything about business future from the past or present. For a number of reasons. There could be an unexpected drought tomorrow that would massively affect the agriculture market. In a few years’ time we could see more technical progress than first thought, which could on one side effect jobs and employment, but on the other bring a massive increase in our economic potential. It is all temperamental.
Yes, it is useful to predict our economic and business future, but I would say that this is more useful in the short term rather than the long term. In the short term we can notice and analyse trends, change and adjust our economic behaviour, and speculate the future. However, in the long term, nothing is really certain.
Whether you are a business owner or a customer, predicting the future in business and economics is a useful way to alter our economic decisions in order to plan and prepare for changes. It is important to know where we are and where we’ve been to know where we are going.