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.

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2 Responses to “Keynes Psychological Law of Consumption”

aftab ansari said...
July 1, 2012 at 11:21 AM

Sir you should also provide definitions and numericals for this Keynesian approach of MPC,MPS,APC AND APS


Kylie Jenner said...
July 24, 2015 at 11:12 PM

I’m trampled by your contents carry on the wonderful work.Opposition in Law


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