Answer to Question #86802 in Macroeconomics for Sushil Kumar Yadav

Question

Explain psychological law of consumption

Answer 1

The basic psychological law is the position that personal consumption depends on income levels formulated by John Maynard Keynes, but its dynamics lag behind income growth.

According to the basic psychological law, people with an increase in the level of their income tend to increase their consumption, but not to the extent of income growth, but to a lesser extent. In other words, the percentage of income directed to savings increases as income rises.

The share of additional income directed to savings is called the marginal propensity to save. The marginal propensity to save as wealth increases. The sum of the marginal propensity to save and the marginal propensity to consume is always one (or 100%).