What is underconsumption?
Underconsumption is an economic phenomenon that occurs when the demand for goods and services falls short of the total amount available. In other words, there is a gap between the production and consumption of goods which leads to a surplus in the market. This can have severe effects on both businesses and consumers alike.
How does underconsumption cause unemployment?
Underconsumption poses a risk to any economy, as it can directly lead to higher levels of unemployment. Underconsumption occurs when people are not buying enough goods and services; if demand from consumer is low, then businesses have to cut production to reduce costs and maintain profitability. When this happens, employment levels naturally drop; fewer jobs mean fewer people are employed and less money is cycled through the economy. Ultimately, the effects of underconsumption on unemployment are far-reaching, leading to a slowdown in economic growth and a lack of investment that further exacerbates employment woes.
Effects of Underconsumption
When underconsumption takes place, businesses are unable to maintain regular production levels as there is inadequate demand for their products or services. This leads to layoffs, cutbacks in wages, and greater competition among firms to maintain their current level of profits. When wages are decreased, consumer purchasing power is drastically lowered which further exacerbates the problem.
At the same time, consumers are faced with an increase in prices due to an oversupply of goods and services on the market. This decrease in buying power means that they must forego purchases of non-essential items such as luxury items or services that may improve their standard of living. This results in decreased consumer confidence which further depresses demand for goods and services.