Importance of the Law of Diminishing Marginal Utility

IMPORTANCE OF THE LAW OF DIMINISHING MARGINAL UTILITY

i.  Taxation: Pro gressive system of taxation, imposing a heavier burd en o n the rich people, is a practical application of this principle in the field of public finance. Richer a person the higher is the rate of the tax he has to pay since to him the marginal utility of money is less.

ii. Price determination: The law expla ins why with increase in its supply, the value of a commodity must fall. It thus forms a basis of the theory of value.

iii. Household expenditure: The law of diminishing marginal utility governs our daily expenditure. Since one knows that a larger purchase w ill mean lower marginal utility, one will restrict their purchase o f a particular commod ity, because the y cannot afford to waste our limited resources.

iv. Downward sloping demand curve: It is this law which tells us why demand curve slope downwards. It is due to this law that smaller utility lines cut larger portions of the commodity line, i.e., X-axis.

v. Value-in-use and value -in-exchange: It also explains the divergence between value-in- use and value- in-exchange.

vi. Socialis m: The marginal utility to the rich o f the wealth, that the y might lose, is not so great as the marginal utility of the wealth which is transferred to the poor.

vii.Basis if some economic laws:  Some very important laws of econo mics are based on the law of diminishing marginal utility, ex. Law of demand, the concept of consumer's surplus, the concept of elasticity of demand, the law of substitution, etc. These laws and concepts have ultimately been derived from the law of diminishing marginal utility.