Question

State the propositions of Keynes’s Psychological Law of Consumption.

Answer 1

1. When income increases, consumption expenditure also increases but by a smaller amount. The reason is that as income increases, we want are satisfied side by side, so that the need to spend more on consumer goods diminishes. So, the consumption expenditure increases with an increase in income but less than proportionately.
2. The increased income will be divided in some proportion between consumption expenditure and saving. This follows from the first proposition because when the whole • of increased income is not spent on consumption, the remaining is saved. In this way, consumption and saving move together.
3. An Increase in income always leads to an increase in both consumption and saving. This means that increased income is unlikely to lead to a fall in either consumption or saving. Thus with increased income both consumption and saving increase.