This law was introduced by the renowned economist Keynes. This law states that, with an increase in income, the consumption also increases but at a lesser rate as compared to the increase in income. Also, along with an increase in the income, a part of the same is employed in savings and as one increases, the other also gets an increment. Even at zero income, a minimal level of consumption does take place, to satisfy the necessities for survival, but there are no savings. This minimal consumption is called Autonomous consumption.
Law of consumption helps us to understand the consumption behaviour. It sets that the rate of increase in the level of income is higher than the rate of increase in the level of consumption. Although income can be zero or negative, but, consumption can never be zero. When the income exceeds the level required to be converted into consumption, a part of it is converted into savings.
Let us understand this with an easy example. We trace the consumption patterns through the following table and graph:
| Y (Income) | C (Consumption) |
|---|---|
| 0 | 20 |
| 50 | 60 |
| 100 | 100 |
| 150 | 140 |
Observations:
- At zero income, consumption worth Rs. 20 is still incurred.
- As income starts to rise, consumption also rises, but at a lesser rate.
- Consumption and income are positively related to each other.
- Eventually, the level of consumption lags behind the level of income.