Psychological Law of Consumption
Understanding the Relationship between Income and Consumption
Introduction
- Welcome to the presentation on the Psychological Law of Consumption.
- In this presentation, we will explore the relationship between income and consumption.
- We will discuss various concepts such as marginal propensity to consume and average propensity to consume.
- Let's dive in!
Marginal Propensity to Consume
- Marginal Propensity to Consume (MPC) measures the change in consumption due to a change in income.
- If MPC is zero, there is no change in consumption with an increase in income.
- If MPC is one, all additional income is consumed.
- MPC can be a value between zero and one, indicating the proportion of income that is consumed.
Average Propensity to Consume
- Average Propensity to Consume (APC) measures the proportion of income that is consumed on average.
- If APC is one, all income is consumed.
- If APC is greater than one, consumption exceeds income, indicating borrowing or savings depletion.
- If APC is less than one, consumption is less than income, indicating savings or investment.
Psychological Laws of Consumption
- The Psychological Law of Consumption states that consumption is a function of income.
- As income increases, consumption also increases.
- However, the increase in consumption is somewhat smaller than the increase in income.
- This implies that the marginal propensity to consume is less than one.
Relationship between Consumption Expenditure and Income
- The relationship between consumption expenditure and income is not proportional.
- If consumption expenditure increases, income increases, but by a smaller amount.
- This relationship holds true for both average propensity to consume and marginal propensity to consume.
- The proportionality between consumption expenditure and income is not linear.
Depression and Investment
- Depression is a state of low economic activity characterized by decreased investment.
- Psychological Laws of Consumption help explain the behavior of consumption and investment during depression.
- During a depression, consumption and investment decrease, leading to a decline in income.
- The concept of investment multiplier plays a role in understanding income generation during a depression.
Absolute Income Hypothesis
- The Absolute Income Hypothesis states that current consumption is determined by current income.
- This hypothesis argues that consumption is not related to permanent income or disposable income.
- The consumption pattern remains the same regardless of changes in income distribution or circumstances.
- However, this hypothesis has been challenged by the Psychological Law of Consumption.