This law is an extension to the law of Diminishing marginal utility. This law is based on the characteristics of the wants. Wants are substitutable. Marshall explained this law with the help of the law of Diminishing marginal utility.
ASSUMPTIONS:
1. Cardinal measurement of utility.
2. Consumer behaves rationally.
3. Marginal utility of money remains same.
4. Utility is independent and depends upon the size of the commodity.
Ux = f ( Qx )
5. Marginal utility of a commodity will gradually diminishes.
6. No change in the tastes and preferences of the consumer.
7. Money is given and which remains constant.
8. Prices of goods are also given and remains constant.
9. The goods are substitutable.
10. Possibility of dividing the commodity into viable units.
IMPORTANCE :
1. It applies to consumption.
2. It applies to production.
3. It applies to exchange.
4. It applies to distribution.
5. It applies to welfare and public finance.
ASSUMPTIONS:
1. Cardinal measurement of utility.
2. Consumer behaves rationally.
3. Marginal utility of money remains same.
4. Utility is independent and depends upon the size of the commodity.
Ux = f ( Qx )
5. Marginal utility of a commodity will gradually diminishes.
6. No change in the tastes and preferences of the consumer.
7. Money is given and which remains constant.
8. Prices of goods are also given and remains constant.
9. The goods are substitutable.
10. Possibility of dividing the commodity into viable units.
IMPORTANCE :
1. It applies to consumption.
2. It applies to production.
3. It applies to exchange.
4. It applies to distribution.
5. It applies to welfare and public finance.
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