WHAT IS 'Underconsumption'

Underconsumption is the purchase of goods and services at levels that fall below the available supply.

BREAKING DOWN 'Underconsumption'

Underconsumption is an economic theory referring to recession and stagnation. In this theory, inadequate consumer demand in relation to the production of a particular good or service results in underconsumption. Underconsumption theories date back hundreds of years and have been largely replaced by modern Keynesian economics and the theory of aggregate demand, which is the total demand for goods and services in the economy at a particular time and price level.

The automobile industry during the Great Depression is an example of underconsumption. During the 1920s, increases in disposable income and the new affordability of automobiles resulted in more people purchasing cars. Increased demand led to the creation of a large number of independent auto dealers and manufacturers. When the stock market crashed and the effects of the depression took hold, many Americans became unemployed and encountered financial troubles, resulting in less purchasing power for cars in relation to the supply. Due to the plummeting demand for automobiles, many independent manufacturers were not able to stay in business.

Differences Between Underconsumption and Keynesian Theory

Underconsumption asserts that consumption of less than is produced is caused by insufficient purchasing power and results in business depression. Furthermore, the theory of underconsumption claims that because workers are paid a wage lower than they produce, they cannot buy back what the produce, therefore resulting in an inadequate demand for the product. This can be rectified by government intervention, specifically spending on public programs, to restore the balance between production and consumption.

Keynesian Theory is a theory of total spending in the economy and its effects on output and inflation, and was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run.

The theory of underconsumption deems inadequate consumer demand to be the only source of recessions, stagnation, and other aggregate demand failures, and therefore a capitalist economy tends toward a state of persistent depression because of this. In contrast, modern economic theories find that inadequate consumer demand does not automatically cause a recession because other factors, including private fixed investments in factories, machines and housing, and government purchases and exports may counteract this situation.

  1. Accelerator Theory

    The accelerator theory is an economic theory whereby as demand ...
  2. John Maynard Keynes

    Keynes is regarded as one of the founding fathers of modern day ...
  3. Theory Of Price

    The theory of price is an economic theory whereby the price for ...
  4. New Keynesian Economics

    New Keynesian Economics is a modern twist on the macroeconomic ...
  5. Aggregate Demand

    Aggregate demand is the total amount of goods and services demanded ...
  6. Market Segmentation Theory

    Market segmentation theory is a theory that there is no relationship ...
Related Articles
  1. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  2. Trading

    John Maynard Keynes - Giant Of Finance

    Keynes' "General Theory" will forever be remembered for giving governments a central role in economics.
  3. Insights

    Seven Decades Later: John Maynard Keynes' Most Influential Quotes

    It's been 72 years since the influential economist died; here are some of his most influential quotes.
  4. Investing

    Modern Portfolio Theory Vs. Behavioral Finance

    Or: How financial markets would work in an ideal world vs. how they work in the real world.
  5. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  6. Insights

    Economist Guide: 5 Lessons John Maynard Keynes Teaches Us

    Read about the paradoxical and confusing world of John Maynard Keynes, including the lessons modern economists can still learn from the British thinker.
  7. Insights

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.
  8. Insights

    Can Infrastructure Spending Really Stimulate the Economy?

    Public infrastructure spending rarely stimulates long-term positive growth for the economy, even in times of recession...
  1. What is demand-side economics?

    Learn the basic theory of demand-side economics, which emphasizes the importance of aggregate demand and supports government ... Read Answer >>
  2. Which factors drive the marginal propensity to consume?

    Discover the main factors of economic policy that, according to Keynesian economic theory, drive the marginal propensity ... Read Answer >>
  3. What is the difference between Keynesian and Neo-Keynesian economics?

    Learn how Neo-Keynesianism, which was developed in the post-war period, departs from classical Keynesian theory and how they ... Read Answer >>
  4. How did John Maynard Keynes influence business cycle theory?

    Read about the impact of John Maynard Keynes on business cycle theory and the development of macroeconomics to study aggregate ... Read Answer >>
  5. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  6. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
Trading Center