Question

explain the law of substitution with diagram. explain limitations

Answer 1

Answer:

The law of substitution is also known as the law of equi-marginal utility or the law of maximum satisfaction. ... According to this law, if a consumer is to use all the available resource in the consumption of a single commodity then marginal utility,derived from every additional unit will decrease successively.

something that limits; a limit or bound; restriction: an arms limitation; a limitation on imports. the act of limiting. the state of being limited. Law. the assignment, as by statute, of a period of time within which an action must be brought, or the period of time assigned: a statute of limitations.

Explanation:

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Answer 2

Law of substitution

" It states if a consumer uses all his available resources just for cosnuming a single good then the marginal utility line of excessive unit will keep on decreasing and hence one consumer for his satisfaction should spend his available income on different types of goods so that the money spent on the last purchase should match their marginal utility ".

Limitations of law of substitution

• The goods are invisible.

Law of substitution is purely based on unrealistic assumption that all the goods are divisible. It is impossible to divide all the goods to sub-units though it can only be divided into their preferences.

• Uncertainty in making choices.

Law of uncertainty can only be applied when there is an alternative of choices are given and that alternative must be certain at any cost. But with the limited income a single consumer can make risky and even uncertain choices while buying a commodity.

• Consumer ignorance.

A consumer should always be aware of the goods he buys and must have proper knowledge of the market rather than being ignorant and following the trend blindly and wasting money on uneccssary goods.

In such cases this law is not applicable as no substitution is taking place as there is lack of alternative.

• Number of unlimited resources.

When there is unlimited resources there will be no use of arranging expenses as they can be used without any cost

Example: Discount, free gifts etc.

In this case this law is not applicable.

• Follower of fashion

A consumer going along with the trend blindly might not make him rational. And according to this law only rational consumer can substitute one good for another else no substitution takes place.

Refer the attachment for the diagram of law of substitution