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Limitations Of The Law Of Substitution

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The law of substitution has several limitations as follows:

1. Ignorance Of Consumer
If the consumer is ignorant or blindly follows custom or fashion, he will make a wrong use of money. Due to his ignorance, he may not be aware of other more alternatives. In this case no substitution takes place and this law does not apply.

2. Commodities Indivisible
The law of substitution is based on the assumption that commodities are divisible and substituable. This is an unrealistic assumption. Though commodities may be divided according to the convenience of the consumer, it is not possible to divide all commodities in small units. There are certain commodities like fan or a radio which cannot be used in case of the indivisible commodities.

3. Utility Not Measurable
This principle of maximum satisfaction is based on the unrealistic assumption of the cardinal measurement of utility and the constancy of the marginal utility of money.

4. Customs And Fashion
Sometimes people are slave of customs or fashion and they are unable to become rational.Without being rational a consumer cannot substitute one thing for another. This is another limitation of this law.

5. Unlimited Resources
The law of substitution has no place when the resources are unlimited as in the case of free gift of nature. In such cases, there is no need to re-arrange expenditure because they can be used without any cost.

6. Choice Uncertain
The alternatives open to the consumer also assumed to be certain. But consumer choices are uncertain and even risky. In fact, it is expected utilities that determine consumer's choices of the various combinations he can buy with a given money income.

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1 comments:

  1. You have explained each point very well.Accountants in Clapham
    Thanks for your great job!

    ReplyDelete