Law of Consumption which forms the basis of the consumption function. He stated that “The fundamental psychological law upon which we are entitled to depend with great confidence both prior from our knowledge of human nature and from the detailed facts of experience, is that men are disposed as a rule and on the average to increase their consumption as their income increases but not by as much as the increase in their income.” The law implies that there is a tendency on the part of the people to spend on consumption less than the full increment of income. Income Income Increases Consumption increases but not equal and to income rises Consumption Assumptions: Keynes’ Law is based on the following assumptions: . Ceteris paribus (constant extraneous variables): The other variables such as income distribution, tastes, habits, social customs, price movements, population growth, etc.
do not change and consumption depends on income alone. . Existence of Normal Conditions: The law holds good under normal conditions. If, however, the economy is faced with abnormal and extraordinary circumstances like war, revolution or hyperinflation, the law will not operate.
People may spend the whole of increased income on consumption. . Existence of a Laissez-faire Capitalist Economy: The law operates in a rich capitalist economy where there is no government intervention. People should be free to spend the increased income.
In the case of regulation of private enterprise and consumption expenditure by the State, the law breaks down. - - Consumption and Investment Functions Propositions of the Law: This law has three propositions: ( ) When income increases, consumption expenditure also increases but by a smaller amount. The reason is that as income increases, our wants are satisfied side by side, so that the need to spend more on consumer goods diminishes. So, the consumption expenditure increases with increase in income but less than proportionately.
( ) The increased income will be divided in some proportion between consumption expenditure and saving. This follows from the first proposition because when the whole of increased income is not spent on consumption, the remaining is