State relationship between income and consumption.

Solution

Relationship between income and consumption expenditure.
(i) According to Keynes, as income increases, consumption expenditure also increases but by less than the increase in income. In other words, when income increases, consumption expenditure does not increase at the same rate as income. This is called Keynesian psychological law of consumption. There is tendency of people not to spend on consumption the whole of incremental income, i.e., additional consumption is less than additional income. In other words, MPC is less than 1 (MPC < 1). For instance, if income increases by र 100; the tendency is to spend a part, say र 75, on consumption and save the remaining part (i.e., र 25). This is known as induced consumption. It should be kept in mind that when income is zero, consumption is positive (+) because a person has to spend a minimum amount to keep his body and soul together. This is called autonomous consumption.
(ii) When income is very low, consumption expenditure is higher than income. Its reason is that some minimum level of consumption has to be maintained irrespective of low level of income. In such a situation, value of APC (i.e., C/Y) becomes higher than 1. For example, if at the income level of र 2000, consumption expenditure is र 2,400, then APC = 2400/2000 = 1.2, i.e., higher than 1.

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