The Kitchin cycle is a short

business cycle Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, governmen ...

of about 40 months, identified in the 1920s by Joseph Kitchin. This cycle is believed to be accounted for by time lags in

information Information is an Abstraction, abstract concept that refers to something which has the power Communication, to inform. At the most fundamental level, it pertains to the Interpretation (philosophy), interpretation (perhaps Interpretation (log ...

movement, affecting the decision making of commercial firms. Firms react to the improvement of commercial situation through the increase in output through the

full employment Full employment is an economic situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may ...

of the extant fixed capital assets. As a result, within a certain period of time (ranging between a few months and two years) the market gets ‘flooded’ with commodities whose quantity becomes gradually excessive. The demand declines,

price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...

s drop, the produced commodities get accumulated in inventories, which informs entrepreneurs of the necessity to reduce output. However, this process takes some time. It takes some time for the information that supply significantly exceeds demand to get to the business people. As it takes

entrepreneur Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones. An entreprene ...

s time to check this information and to make the decision to reduce production, time is also necessary to materialize this decision (these are the time lags that generate the Kitchin cycles). Another relevant time lag is the lag between the decision (causing the capital assets to work well below the level of their full employment) and the decrease of the excessive amounts of commodities accumulated in inventories. Yet, after this decrease takes place one can observe the conditions for a new phase of growth of

demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...

, prices, output, etc. For example, the volume of oil production on tight oil formations in the US depends significantly on the dynamics of the WTI oil price. About six months after the price change, drilling activity changes, and with it the volume of production. These changes and their expectations are so significant that they themselves affect the

price of oil The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC ...

and hence the volume of production in the future. These regularities are described in mathematical language by a differential extraction equation.

References

{{Reflist Business cycle theories

See also

References