In underconsumption theory in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. It means that there is an overproduction and a demand crisis. The theory formed the basis for the development of Keynesian economics and the theory of aggregate demand after the 1930s.
What is ‘Underconsumption’
The purchase of goods and services at levels that fall below the available supply. Underconsumption as an economic theory describes a situation where recession and stagnation occurs in reaction to inadequate consumer demand in relation to the amount (of a particular good or service) produced. Underconsumption theories date back hundreds of years and have been largely replaced by modern Keynesian economics and the theory of aggregate demand (the total demand for goods and services in the economy at a particular time and price level).
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, government purchases and exports – may counteract this situation.
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