Question

Explain the Keynesian psychological law of consumption.

Explain Keynes’ Law of consumption function or psychological law of consumption.

Explain the consumption function of Keynes.

Answer 1

Psychological Law of Consumption:

The Keynesian concept of consumption function stems from the fundamental psychological law of consumption, which states that there is a common tendency for people to spend more on consumption when income increases, but not to the same extent as the rise in income, because a part of the income is also saved. The community, as a rule, consumes as well as saves a larger amount with a rise in income.

The Keynes consumption function can be expressed in the following form:

C = a + bY_d

where C is consumption expenditure and Y_d is the real disposable income, which equals gross national income minus taxes, a and b are constants, where a is the intercept term, that is, the amount of consumption expenditure at zero level of income.

Thus, a is autonomous consumption.

The parameter b is the marginal propensity to consume (MPC), which measures the increase in consumption spending in response to a per-unit increase in disposable income.

Thus,

MPC = `(∆C)/(∆Y)`