Question

Explain the implications or importance of psychological Law of Consumption.

Give implications of Keynes’ psychological Law of Consumption if any.

Give importance of Keynes’ psychological Law of Consumption.

Answer 1

1. Strategic Role of Investment: Since consumption does not increase as much as income, the saved portion of income can be channeled into investment. This drives economic growth through capital formation.
2. Possibility of Overproduction and Unemployment: Because consumption rises less proportionally than income, aggregate demand might not keep pace with aggregate supply, leading to surplus production and potential unemployment.
3. Repudiation of Say’s Law: Keynes’s Law challenges Say’s Law, which asserts that supply creates its own demand. The psychological law shows demand might fall short because consumption propensities vary with income.
4. Under-Employment Equilibrium: It explains how economies can be stuck with underemployment equilibria where resources are not fully utilized due to insufficient aggregate demand arising from low consumption propensities.