The consumer goods and services demanded by the households constitute the consumption demand. In this regard, Keynes propounded a law known as the ‘Fundamental Psychological Law of Consumption.’ According to Keynes, consumption depends on personal disposable income and as income rises, consumption also rises but not as much as the increases in income. That means a part of the increase in income is saved. In other words, Marginal propensity to Consume (MPC) is always less than one.
In Keynes’ consumption function, The relationship between consumption spending and income is usually explained in an equation form :
C = a + bY (a > 0; 0 < b < 1)
Here, C and Y represent consumption and income, respectively. This equation indicates that consumption is a linear function of income since it is the equation of a straight line. In the equation, ‘a’ stands for autonomous consumption. This part of consumption spending is independent of the level of income.
Its value is positive in the sense that consumption is always positive, even if income is zero, ‘b’ is-the behavioral coefficient or the MPC. This part of consumption is called ‘induced’ consumption. According to Keynes, MPC is always positive, but less than one. Here ‘b’ is the slope of the consumption function. Thus, MPC is the slope of the consumption line.Plotted on a piece of graph paper, aggregate consumption curve becomes upward sloping as illustrated below.