Keynes Psychological Law of Consumption
                     Keynes Psychological 
Law of Consumption
Throughout the history of 
economics, there have 
been numerous 
economists that introduced 
new theories and laws. 
While some of them were 
accepted and contributed 
to the modern economic 
system, others simply 
perished with time. Keyne’s 
psychological law of 
consumption is one that is 
still being used today.
What is Keynes’s Psychological Law of Consumption?
This law is known by two other names, Consumption Function and Fundamental 
Psychological Law. This is more or less an economic formula that portrays the 
association between income and consumption formulated by a British economist, 
John Maynard Keynes, in 1936. Although this law has the word ‘psychological’ in 
its name, the psychological aspect is the general observation of consumer 
behavior. According to this law, a portion of the raised income that is spent on 
consumption known as the marginal propensity to consume (MPC), and marginal 
propensity to save (MPS), which is how savings are influenced by increased 
income, are greater than zero but less than one.
Assumptions of Psychological Law of Consumption
1. Normal Conditions
The first condition of this law is that it only applies during stable conditions, i.e., this law does not uphold 
during the time of war, recession, expansion, political issues, strikes, natural disasters, and more.
2. Constant Psychological and Institutional Complex
Once again, this law only applies when the psychological and institutional complex remains the same. 
Here, the psychological and institutional complex refers to aspects like population, preferences, habits, 
fashion, and more.
3. Capitalist Economy
This is self-explanatory, as, within a capitalist economy, people are free to choose between products 
and can purchase whatever goods and services are required. Whereas, in a communist economy, the 
state is constantly interfering with the production and supply of products and services. Also, the 
competition is eliminated, resulting in people only buying what is available.
Propositions of Psychological Law of Consumption
1. Increase in Consumption
When the aggregate income increases, it results in an increase in aggregate 
consumption, but only by a small amount, meaning that when the gross income is 
increased, so do the consumption and saving; however, the increase in the level of 
consumption is always less than the increase in the level of income. The reason 
for the increase in savings is that the necessities are already fulfilled.
2. Bifurcate Consumption and Savings
The total income after the raise is divided between consumption and saving. 
Although the proportions of this division vary, the consumption is usually higher 
than saving. It can be represented as
∆Y= ∆C + ∆S
Where,
∆  signifies change
∆Y represents the change in income
∆C means the change in consumption
∆S shows the change in saving
3. Non-declining Factors
Both consumption and saving will increase with an increase in income; 
however, these two can never decrease with an increase in income.
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