Psychological factors:
- According to Pigou, modern business activities are based on the anticipations of business community and are auected by waves of optimism or pessimism. Business fluctuations are the outcome of these psychological states of mind of businessmen.
- If entrepreneurs are optimistic about future market conditions, they make investments, and as a result, the expansionary phase may begin. The opposite happens when entrepreneurs are pessimistic about future market conditions.
- Investors tend to restrict their investments. With reduced investments, employment, income and consumption also take a downturn and the economy faces contraction in economic activities.
- According to Schumpeter’s innovation theory, trade cycles occur as a result of innovations which take place in the system from time to time. The cobweb theory propounded by Nicholas Kaldor holds that business cycles result from the fact that present prices substantially influence the production at some future date.
- The present fluctuations in prices may become responsible for fluctuations in output and employment at some subsequent period.
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