Fundamental Psychological Law
John Maynard Keynes, in 1936, proposed the psychological law in his work - The General Theory of Employment, Interest and Money. The law basically captures and understands the essential spending behavior of the household sector. Keynes uses the term 'psychology' in his law but the law is just a basic observation of consumer behavior and consumption. It 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. 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.Therefore,in Keynesian macroeconomics, the Fundamental Psychological Law underlying the consumption function states that marginal propensity to consume (MPC) and marginal propensity to save (MPS) are greater than zero(0) but less than one(1) MPC+MPS = 1 e.g. Whenever national income rises by $1 part of this will be consumed and part of this will be saved
Read more about Fundamental Psychological Law: Assumptions, Psychological Law of Consumption
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