PSYCHOLOGICAL LAW OF CONSUMPTION

The main purpose of every economic activity, be it production or exchange, is consumption. It is consumption that motivates man to produce. All the production activity would come to a standstill, if there is no consumption. However, such situation is elusive. Keynes has explained the consumption behaviour of individual through the Psychological Law of Consumption. According to this law “men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not as much as the increase in their income2”.This law is also known as ‘consumption function’ or ‘propensity to consume’. The law can be explained with the help of the following propositions based on the psychology of normal human being. As income increases, absolute amounts of both consumption expenditure and saving will go up. An increase in income is unlikely to decrease consumption spending or saving. Further, the increment of income is divided between consumption and saving in a manner that consumption spending increases by a smaller proportion with every increase in the aggregate income. The reason is that as income rises, more important (primary needs) get satisfied and, therefore, less amounts are required to be spent on relatively less important wants (comforts and luxuries) out of subsequent increase in income. Thus, the absolute level of consumption as well as saving rises, but smaller proportion of income will be consumed (or a larger proportion of income will be saved, as income rises and vice-versa). This can also be understood with the help of the following Table 3.1 given below.



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