{"id":4317,"date":"2020-04-05T12:06:25","date_gmt":"2020-04-05T12:06:25","guid":{"rendered":"https:\/\/commerceiets.com\/?p=4317"},"modified":"2020-04-05T12:06:25","modified_gmt":"2020-04-05T12:06:25","slug":"keynesian-psychological-law-of-consumption","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/","title":{"rendered":"KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_72 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#KEYNESIAN_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\" title=\"KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION\">KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#PROPOSITIONS_OF_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\" title=\"PROPOSITIONS OF PSYCHOLOGICAL LAW OF CONSUMPTION\">PROPOSITIONS OF PSYCHOLOGICAL LAW OF CONSUMPTION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#ASSUMPTIONS\" title=\"ASSUMPTIONS\">ASSUMPTIONS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#TABULAR_EXPLANATION\" title=\"TABULAR EXPLANATION\">TABULAR EXPLANATION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#DIAGRAMMATIC_EXPLANATION\" title=\"DIAGRAMMATIC EXPLANATION\">DIAGRAMMATIC EXPLANATION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#SIGNIFICANCE_RELEVANCE_IMPORTANCE_OF_THE_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\" title=\"SIGNIFICANCE\/ RELEVANCE\/ IMPORTANCE OF THE PSYCHOLOGICAL LAW OF CONSUMPTION\">SIGNIFICANCE\/ RELEVANCE\/ IMPORTANCE OF THE PSYCHOLOGICAL LAW OF CONSUMPTION<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Vital_Importance_of_Investment\" title=\"Vital Importance of Investment:\">Vital Importance of Investment:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#General_over_Production\" title=\"General over Production:\">General over Production:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Repudiation_of_Says_Law\" title=\"Repudiation of Say\u2019s Law:\">Repudiation of Say\u2019s Law:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Need_for_State_Intervention\" title=\"Need for State Intervention:\">Need for State Intervention:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Over_Saving_Gap\" title=\"Over Saving Gap:\">Over Saving Gap:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Decline_in_MEC\" title=\"Decline in MEC:\">Decline in MEC:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Income_Propagation\" title=\"Income Propagation:\">Income Propagation:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Under_Employment_Equilibrium\" title=\"Under Employment Equilibrium:\">Under Employment Equilibrium:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Secular_Stagnation\" title=\"Secular Stagnation:\">Secular Stagnation:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/#Turning_Points_of_Trade_Cycle\" title=\"Turning Points of Trade Cycle:\">Turning Points of Trade Cycle:<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"keynesian-psychological-law-of-consumption\"><span class=\"ez-toc-section\" id=\"KEYNESIAN_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\"><\/span><strong><u>KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>John Maynard Keynes has explained the <a href=\"https:\/\/commerceiets.com\/consumption-function\/\" target=\"_blank\" rel=\"noreferrer noopener\">consumption<\/a> behaviour of the household sector through the Psychological Law of Consumption.in his work \u2013 <strong>The General Theory of Employment, Interest and Money &nbsp;published in 1936<\/strong>. Therefore, this law is also known as \u201cKeynesian psychological law of consumption\u201d. It provides a key part of the consumption foundation upon which Keynesian economics is built.<\/p>\n\n\n\n<p>The law basically captures and understands the essential spending behavior of the household sector. in any capitalistic or mixed economy<\/p>\n\n\n\n<p>Keynes uses the term \u2018psychology\u2019 in his law it is not really a law of psychology or of psychological behavior. It is just a basic observation of consumption behavior and consumption expenditure by the households.<\/p>\n\n\n\n<p>The Psychological Law of Consumption states the relationship between income and consumption pattern, such as the changes in the aggregate income of the economy and the expenditures on consumption by the household sector.<\/p>\n\n\n\n<p>The law is thus, a macro framework of the operation of the economy as it applies more to the aggregate economy than to the individuals.<\/p>\n\n\n\n<p><strong>ACCORDING TO LORD JOHN MAYNARD KEYNES<\/strong><\/p>\n\n\n\n<p>\u201cCurrent consumption depends upon current disposable income. A rise in income leads to a rise in consumption and a fall in consumption leads to a fall in consumption\u201d.<\/p>\n\n\n\n<p>In simple words aggregate consumption is a function of aggregate disposable income. The empirical consumption-income relationship is presented by the consumption function.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"propositions-of-psychological-law-of-consumption\"><span class=\"ez-toc-section\" id=\"PROPOSITIONS_OF_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\"><\/span><strong><u>PROPOSITIONS OF PSYCHOLOGICAL LAW OF CONSUMPTION<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The psychological law of consumption put forward by Keynes, is mainly based on the following three facts:<\/p>\n\n\n\n<p><strong>1<\/strong>.&nbsp;<strong>Increased aggregate consumption (by a smaller amount) due to increased aggregate income<\/strong>:<\/p>\n\n\n\n<p>When aggregate income increases, aggregate consumption increases but the increase in aggregate consumption is less than increase in aggregate income.<\/p>\n\n\n\n<p>This is because as income increases more and more of our wants get satisfied. When the basic necessities or demand of the people are already fulfilled not as much is again spent on consumption as the increase in income.<\/p>\n\n\n\n<p>Consumption expenditure will no doubt increase with increase in income but less than proportionately and therefore, savings also increase as income increases.<\/p>\n\n\n\n<p><strong>2<\/strong>.&nbsp;<strong>Division of the increased income between the consumption and saving:<\/strong><\/p>\n\n\n\n<p>The second proposition is that when income increases, the increments of income will be always be bifurcated into saving and consumption this really follows from first proposition.<\/p>\n\n\n\n<p>Consumption spending does not increase at the same rate as the increase in income, ie only a part is consumed. Therefore a part of the increased income is saved and ie what is not spent is saved.<\/p>\n\n\n\n<p>Saving is thus the complement of consumption.<\/p>\n\n\n\n<p>Thus, the increased income does get divided between the two in certain proportion and can be showed as:<\/p>\n\n\n\n<p><strong>\u2206Y= \u2206C + \u2206S<\/strong><\/p>\n\n\n\n<p>Where,&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; \u2206 = signifies change<\/p>\n\n\n\n<p>\u2206Y = change in Income<\/p>\n\n\n\n<p>\u2206C = change in Consumption<\/p>\n\n\n\n<p>\u2206S = change in Saving<\/p>\n\n\n\n<p>Thus savings create a gap between Income and Consumption.<\/p>\n\n\n\n<p><strong>3<\/strong>.&nbsp;<strong>An increase in income will increase both consumption and savings<\/strong><\/p>\n\n\n\n<p>The third proposition included in Keynes Psychological Law is that as aggregate income increases both consumption spending and savings will increase ie the consumers will spend a little more than before and also save more than before.<\/p>\n\n\n\n<p>It is not possible for savings and consumption to decrease when income increases.<\/p>\n\n\n\n<p>A rise in income will be accompanied by a rise in savings and a fall in income will be accompanied by a fall in savings. The rate of increase or decrease in savings will be greater in the initial stages of increase or decrease in income than in the later stages.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"assumptions\"><span class=\"ez-toc-section\" id=\"ASSUMPTIONS\"><\/span><strong><u>ASSUMPTIONS<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Keynes psychological law of consumption is limited by the following assumptions.<\/strong><\/p>\n\n\n\n<p><strong>&nbsp;1. Normal Conditions<\/strong>:<\/p>\n\n\n\n<p>The psychological law applies only under normal economic conditions and when there is no danger of war or cold war, depression, boom, political upheaval, revolution inflation etc in the economy.<\/p>\n\n\n\n<p><strong>2. The propensity to consume remains stable<\/strong><\/p>\n\n\n\n<p>The propensity to consume remains stable or same as habits of the people regarding spending do not change owing to the constancy of the existing psychological and institutional complexities influencing consumption expenditure.<\/p>\n\n\n\n<p><strong>3. Psychological and Institutional Complex remains the same:<\/strong><\/p>\n\n\n\n<p>It means that there is no change in the psychological and institutional complex. Among the factors influencing the consumer, only the income will change, other institutional factors such as, desire, income behaviour, fashion, tastes and preferences, availability of goods, habits of the people, advertisement, salesmanship, tax policy population, price, etc. related to psychology do not change.<\/p>\n\n\n\n<p><strong>4. Capitalist Economy based on Laissez- faire<\/strong>:<\/p>\n\n\n\n<p>The psychological law applies to free and prosperous capitalists economies and does not hold well in socialist and under-developed economies.<\/p>\n\n\n\n<p>This is because, in a free economy, the people can consume any kind of goods they want, according to their necessities and desires and also there is no interference of the government in the economic affairs.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"tabular-explanation\"><span class=\"ez-toc-section\" id=\"TABULAR_EXPLANATION\"><\/span><strong><u>TABULAR EXPLANATION<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The&nbsp;Keynesian consumption function&nbsp;is now explained with the help of schedule and a curve.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>DISPOSABLE INCOME (Y)<\/strong><\/td><td><strong>CONSUMPTION (C)<\/strong><\/td><td><strong>SAVING (S)<\/strong><\/td><td><strong>APC (C\/Y)<\/strong><\/td><td><strong>MPC (\u0394C\/\u0394Y)<\/strong><\/td><\/tr><tr><td>0<\/td><td>50<\/td><td>-50<\/td><td>&nbsp;<\/td><td>&nbsp;<\/td><\/tr><tr><td>100<\/td><td>100<\/td><td>0<\/td><td>1.00<\/td><td>0.5<\/td><\/tr><tr><td>200<\/td><td>150<\/td><td>50<\/td><td>0.75<\/td><td>0.5<\/td><\/tr><tr><td>300<\/td><td>200<\/td><td>100<\/td><td>0.67<\/td><td>0.5<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>In the schedule, it is shown that as the nation\u2019s disposable income increases, the aggregate consumption at various levels of income also increases but at a decreasing rate.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"diagrammatic-explanation\"><span class=\"ez-toc-section\" id=\"DIAGRAMMATIC_EXPLANATION\"><\/span><strong><u>DIAGRAMMATIC EXPLANATION<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"510\" height=\"478\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/04\/image-22.png\" alt=\"\" class=\"wp-image-4321\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/04\/image-22.png 510w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/04\/image-22-300x281.png 300w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><figcaption>KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION<\/figcaption><\/figure>\n\n\n\n<p>Following are the&nbsp;<strong>observations<\/strong>&nbsp;about the functional relationship between the national disposable income and the economy\u2019s aggregate expenditure.<\/p>\n\n\n\n<p>(i) At every point on the 45<sup>0<\/sup>&nbsp;line OY, a vertical line drawn to the income axis is at the same distance from the origin as a horizontal line drawn to the consumption axis. The 45<sup>0<\/sup>&nbsp;line thus is the line along which expenditure equals real income.<\/p>\n\n\n\n<p>&nbsp;(ii) The consumption function is represented by consumption line (C). The consumption line C is positively sloped indicating that as the disposable income increases, the expenditure in the economy also increases.<\/p>\n\n\n\n<p>(iii) The consumption line (C) intercepts at Y axis showing negative saving of $50 billion during a short period.<\/p>\n\n\n\n<p>(iv) At point B the consumption line (C) intersects the 45<sup>0<\/sup>&nbsp;helping line (OY) saving. At point B, consumption equals disposable income and there is zero saving. B is called the&nbsp;<strong><em>break even point.<\/em><\/strong><\/p>\n\n\n\n<p>(v) Left to the point B, the consumption line C is above the income line Y. It indicates negative saving.<\/p>\n\n\n\n<p>(vi) Right to the point B, the consumption line C is below the income line Y. It denotes positive savings.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"significance-relevance-importance-of-the-psychological-law-of-consumption\"><span class=\"ez-toc-section\" id=\"SIGNIFICANCE_RELEVANCE_IMPORTANCE_OF_THE_PSYCHOLOGICAL_LAW_OF_CONSUMPTION\"><\/span><strong><u>SIGNIFICANCE\/ RELEVANCE\/ IMPORTANCE OF THE PSYCHOLOGICAL LAW OF CONSUMPTION<\/u><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"vital-importance-of-investment\"><span class=\"ez-toc-section\" id=\"Vital_Importance_of_Investment\"><\/span>Vital Importance of Investment:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>One of the most important implications of Keynes\u2019 psychological law of consumption is that it brings about the crucial importance of investment if we want to attain higher level of income and employment. The law says when income increases the gap between income and consumption increases.<\/p>\n\n\n\n<p>The gap is to be filled by bringing more and more investment failing which there will be shortage of effective demand and the economy would slip down. Thus the law highlights the vital importance of investment.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"general-over-production\"><span class=\"ez-toc-section\" id=\"General_over_Production\"><\/span>General over Production:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Since the marginal propensity to consume is less than unity, with every increase in income, consumption would tend to lag behind income which would result in overproduction and unemployment. Thus the law tells us that there can occur a general overproduction and unemployment.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"repudiation-of-say-s-law\"><span class=\"ez-toc-section\" id=\"Repudiation_of_Says_Law\"><\/span>Repudiation of Say\u2019s Law:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Keynes with the help of his law of consumption repudiates Say\u2019s law which states supply creates its own demand. Since the marginal propensity to consume is less than unity all that is supplied is not automatically demanded. The supply fails to create its own demand resulting in glut of products in the market.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"need-for-state-intervention\"><span class=\"ez-toc-section\" id=\"Need_for_State_Intervention\"><\/span>Need for State Intervention:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>As there is no automatic and self-adjusting mechanism between supply and demand the government should interfere actively to ensure that aggregate effective demand does not fall below aggregate supply.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"over-saving-gap\"><span class=\"ez-toc-section\" id=\"Over_Saving_Gap\"><\/span>Over Saving Gap:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Since the increase in consumption expenditure does not keep pace with the increase in income, there arises the danger of over-saving gap. This danger is more for rich countries than for poor countries.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"decline-in-mec\"><span class=\"ez-toc-section\" id=\"Decline_in_MEC\"><\/span>Decline in MEC:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>As a result of the propensity to consume remaining stable with an increase in income the expected rate of profitability or the marginal efficiency of capital may tend to decline. This can be prevented only by increasing consumption with an increase in income because ultimately the decisions to undertake investments are guided by the volume of consumption.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"income-propagation\"><span class=\"ez-toc-section\" id=\"Income_Propagation\"><\/span>Income Propagation:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Keynesian theory explains the slow nature of income propagation. Since the marginal propensity to consume is less than unity, injection of increasing purchasing power into the income stream leads to smaller and smaller successive increments to income.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"under-employment-equilibrium\"><span class=\"ez-toc-section\" id=\"Under_Employment_Equilibrium\"><\/span>Under Employment Equilibrium:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Equilibrium would be attained at full employment only if investment demand happens to be equal to the gap between aggregate income corresponding to full employment and aggregate consumption expenditure out of that income. But Keynes believed that the typical investment demand would not be adequate to fill the gap between the amount of income corresponding to full employment and the consumption demand out of that income. As such the aggregate demand and supply schedules would intersect at a point less than full employment.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"secular-stagnation\"><span class=\"ez-toc-section\" id=\"Secular_Stagnation\"><\/span>Secular Stagnation:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>With the increase in income, since consumption cannot be easily increased and investment demand becomes weaker and weaker the economy may sooner or later reach a stage where it may not be able to provide outlets for its growing savings which is necessary for maintaining full employment. This stage is known as secular stagnation. Such a situation could be avoided if the consumption function were not stable.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"turning-points-of-trade-cycle\"><span class=\"ez-toc-section\" id=\"Turning_Points_of_Trade_Cycle\"><\/span>Turning Points of Trade Cycle:<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Keynes\u2019 psychological law of consumption is very helpful in explaining the turning points of the trade cycle. When the business cycle reaches the highest point of prosperity, income has increased, but the marginal propensity to consume being less than unity, consumption does not increase correspondingly and the result is the downward start of the cycle.<\/p>\n\n\n\n<p>Similarly when the business cycle reaches the lowest point, income has declined very low but since people do not reduce their consumption to the full extent of decline in income, the upward phase of the cycle starts. Thus consumption function occupies a very important place in the theory of employment.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/demand\/\">Theory of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-demand\/\">Law of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/demand-function\/\">Demand Function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/exceptions-of-law-of-demand\/\">Exceptions of law of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\">Elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/change-in-demand\/\">Change in demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/price-elasticity-of-demand\/\">Price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-law-of-demand-and-elasticity-of-demand\/\">Law of demand Vs Elasticity of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/factors-affecting-price-elasticity-of-demand\/\">Factors affecting price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/production-function\/\">Production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\">Short run vs long run production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-variable-proportions\/\">Law of variable proportions<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/types-of-demand\/\">Types of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/managerial-economics\/\">Managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/characteristics-of-managerial-economics\/\">Characteristics of managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-managerial-economics\/\">Scope of managerial economics<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/utility-analysis\/\">Utility analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\">Law of diminishing marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-equi-marginal-utility\/\">Law of equi marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium\/\">Consumers Equilibrium<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/indifference-curve-analysis\/\">Indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium-using-indifference-curve-analysis\/\">Consumer equilibrium using indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-tp-ap-and-mp\/\">Relationship between TP, AP and MP<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-increasing-returns\/\">Law of increasing returns<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-returns\/\">Law of diminishing returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-constant-returns\/\">Law of constant returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/returns-to-scale\/\">Returns to Scale<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/economies-and-diseconomies-of-scale\/\">Economies and diseconomies of scale<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\">Concept of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-ac-and-mc\/\">Relationship between AC and MC<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\">Traditional theory of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\">Modern theory of costs<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explicit-vs-implicit-costs\/\">Explicit vs Implicit costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/revenue\/\">Revenue<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\">Perfect competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-meaning\/\">Monopoly<\/a>&nbsp;<\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/price-discrimination\/\">Price discrimination<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-perfect-competition-and-monopoly\/\">Difference between perfect competition and monopoly<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-and-monopolistic-competition\/\">Perfect Vs Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-and-monopolistic-competition\/\">Monopoly and monopolistic competition<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/product-differentiation-strategy\/\">Product differentiation strategy<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\">Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/national-income-in-india\/\">National Income in India<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/measurement-of-national-income\/\">Measurement of national income in India<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/consumption-function\/\">Consumption function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\">Keynes Psychological law of consumption<\/a><\/td><td><\/td><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"266\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg\" alt=\"KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION\" class=\"wp-image-787\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-300x78.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-768x199.jpg 768w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1536x398.jpg 1536w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize.jpg 1920w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION John Maynard Keynes has explained the consumption behaviour of the household sector through the Psychological Law of Consumption.in his work \u2013 The General Theory of Employment, Interest and Money &nbsp;published in 1936. Therefore, this law is also known as \u201cKeynesian psychological law of consumption\u201d. It provides a key part of&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;KEYNESIAN PSYCHOLOGICAL LAW OF CONSUMPTION&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":4319,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[113,92],"tags":[],"class_list":["post-4317","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-managerial-economics","category-micro-economics"],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4317","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=4317"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4317\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/4319"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=4317"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=4317"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=4317"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}