Question

Keynes three points on psychological law of consumption

Answer 1

The psychological law of consumption shows the relationship between income and consumption pattern that exists among the household sectors in an economy.

As stated by Keynes, “The psychology of the community is such that when the aggregate real income increases, aggregate consumption also increases, but not as much as income.”

The law is based on three interrelated propositions:

1. When aggregate income increases, consumption expenditure also increases, but less proportionately. This is because, as a person’s income increases, most of their wants are gradually satisfied. So, less is spent on consumption after a subsequent level of increment in their income.

2. It follows that the increment in the level of income is always divided into spending and saving.

3. An increase in income thus, leads to an increase in consumption as well as savings. Normally, people would spend more and save more when income increases.