(4) Explain Keynesian Psychological Law of Consumption.
Answers
Answer:
Keynes put forward a psychological law of consumption, according to which, as income increases consumption increases but not by as much as the increase in income. In other words, marginal propensity to consume is less than one.
Answer:
Further, Keynes put forward a psychological law of consumption, according to which, as income increases consumption increases but not by as much as the increase in income.
In other words, marginal propensity to consume is less than one.
1 > ∆C/∆Y > 0
While Keynes recognized that many subjective and objective factors including interest rate and wealth influenced the level of consumption expenditure, he emphasized that it is the current level of income on which the consumption spending of an individual and the society depends.
To quote him:
“The amount of aggregate consumption depends mainly on the amount of aggregate income. The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience is that men (and women, too) are disposed, as a rule and on an average to increase their consumption as their income increases, but not by as much as the increase in their income”
In the above statement about consumption behaviour, Keynes makes three points. First, he suggests that consumption expenditure depends mainly on absolute income of the current period, that is, consumption is a positive function of the absolute level of current income. The more income in a period one has, the more is likely to be his consumption expenditure in that period.