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Keynes discovered the functional relationship between income and consumption on the basis of general observation and deductive reasoning. His law has been verified empirically in the recent years by a number of economists and is found to be correct basically. This law has some important implications:

First, it invalidates Say’s law, as with increase in income, consumption increase by a smaller amount. In other words, all that is produced (income) is not taken off (spent) from the market, as income rises. Thus, supply fails to create its own demand. Rather, it leads to over production.

Second, psychological law of consumption results in a gap between income and consumption. This tendency widens as people become rich, who have low marginal propensity to consume (MPC). In advanced economy, such gap countries to rise on account of low propensity to consume. The economy may sooner or later, reach a stage where the savings of the economy would not be utilized fully and effectively, leading to a situation to which Keynes call secular stagnation, arising purely on account of stable  propensity to consume. As the consumption function is stable in the short run, this gap can only be filled by an increase in investment, which is a remedy to overcome unemployment.

Third, Keynes` notion of under employment equilibrium is also based on this law. As consumers do not spend the full increment of their income, there remains a deficiency in aggregate demand, resulting in lower profits and lower marginal efficiency of capital (discussed in detail in next chapter on Investment Function).A need for state intervention is required to avert general over production and under employment through public works programmes.

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