Law of consumption is based on the following assumptions:
1. Short – period
This law is related to the short run because in the run distribution of income, price-level, population growth, fashion, tastes and behavior, etc. won’t change. Consumption will only depend upon income, so low of consumption function is based on this assumption.
2. Normal situation
There should be a normal situation in the economy for the application of this law. In such a situation, war, revolution or regime change, hyper-inflation, etc. should not occur.
3. Laissez-faire capitalistic economy
Psychological law of consumption is only applicable to the capitalistic economy where there is no interference of any kind from the government. That is law of consumption won’t be applicable if government interference occurs.
1. Short – period
This law is related to the short run because in the run distribution of income, price-level, population growth, fashion, tastes and behavior, etc. won’t change. Consumption will only depend upon income, so low of consumption function is based on this assumption.
2. Normal situation
There should be a normal situation in the economy for the application of this law. In such a situation, war, revolution or regime change, hyper-inflation, etc. should not occur.
3. Laissez-faire capitalistic economy
Psychological law of consumption is only applicable to the capitalistic economy where there is no interference of any kind from the government. That is law of consumption won’t be applicable if government interference occurs.
Thank you so much. Was very helpful!
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