Monday, August 24, 2009
Keynes Psychological Law of Consumption
Keynes produced a Law based on the analysis of consumption function. This Law is called Fundamental Law of consumption or Psychological Law of consumption. It states that aggregate consumption is a functioning aggregate disposable income.
Proposition of the Law: This law consists of three related proposition stated below.
(i) When aggregate income increases, consumption expenditure will also increase but by somewhat smaller amount. The reason is that as income increases more and more of our wants get satisfied, hence not as much is again spent on consumption as the increase in income. Consumption expenditure will no doubt increase but not to the same extent as increase in income.
(ii) The second proposition is that when income increases, the increments of income will be divided in same proposition between saving and consumption this really follows from first proposition. Since consumption spending does not increase at the same rate as the increase in income, a part of the increased is saved and only a part is consumed. That is why consumption and savings go side by side. What is not consumed is saved. Saving is thus the complement of consumption.(iii) The third proposition included in Keynes Psychological Law is that as income increases both consumption spending and savings will go up. An increment of income is unlikely to lead either to less spending or less savings than before. It will seldom happen that a person may decrease his consumption or his savings when he has got more income. He will spend a little more than before and also save more than before. Tags: Macro Economics
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