Write explanatory answer.
State and explain J.M. Keynes's 'psychological law of consumption'.
State and explain J.M. Keynes's 'psychological law of consumption'.
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 + bYd
where C is consumption expenditure
and
Yd 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 per unit increase
in disposable income.
Thus
MPC = ∆C/∆Y
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 + bYd
where C is consumption expenditure and
Yd 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 per unit increase in disposable income.
Thus
MPC = ∆C/∆Y
