DownloadCreate AI Presentation

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.

Related Presentations

Expanding Bekia’s Horizons

Budget Preparation and Its Implementation in Pharmacy Practice

Heritage: Our Shared Identity

Mahina's Annual Strategy

Decoding Informal Economies

Exploring Existence: Philosophy Unveiled