Consumption spending: Marginal propensity to consume
Channel: econom
Date: 21/12/2015

Keynes (1936:96) had the following to say about the behaviour of households:

The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed to increase their consumption as income increases, but not as much as the increase in income.



An increase in income increases consumer spending, but the increase in consumer spending is less than the increase in income. In other words, if the income of households increases by R100 million, we can expect consumer spending to increase, but the increase will be less than R100 million.

This relationship between an increase in income and corresponding but smaller increase in consumption is captured by the marginal propensity to consume (c)