Practical Importance Of The Law Of Diminishing Marginal Utility:

Practical Importance Of The Law Of Diminishing Marginal Utility:
Reviewed by Hammad Naziron Apr 01 2013
Rating: 5

Practical importance of the law Of Diminishing Marginal Utility:

Importance of the law Of Diminishing Marginal Utility
The law of diminishing marginal utility has great practical importance in economics.

Let us explain the importance of the law Of Diminishing Marginal Utility:

1) The law of Marginal Utility and the Law of Demand:
The law of Marginal Utility and the Law of Demand are closely related with each other. The law of diminishing marginal utility is the base of the law of demand. According to law of diminishing marginal utility, the more we have of a good, the less we want additional increment of it. So as a person gets more and more of a particular commodity, the marginal utility of the successive unit begins to diminish. So every consumer while buying a particular commodity compares the marginal utility of a commodity and the price of the commodity that he has to pay. If the marginal utility is higher than the price, he purchases the commodity. As he buys more and more, the marginal utility begins to diminish. Then he pays fewer amounts for the successive units. So it is clear that the law of diminishing marginal utility and the law of demand are closely related.

2) Consumer Surplus:
The theory of consumer surplus is also based on this law of Diminishing Marginal Utility. A consumer while purchasing the commodity compares the utility of the commodity with that of price which he has to pay. In most of the cases he will to pay more than what he actually pays. The excess of the price which he would be willing to pay rather than to go with out the thing over that which he actually does pay is the economic measure of this surplus satisfaction.

3) Distribution of Expenditure:
A consumer in order to get the maximum satisfaction from his scarce income, distributes his income on goods and services in such a way that the marginal utility from all the uses are the same. Here, again the concept of marginal utility helps the consumer in arranging his scale of preferences for the commodities.

4) System of Taxation:
The law of diminishing marginal utility also helps in making of a tax policy. A finance minister knowing this fact that the marginal utility of money to a rich man is low and a poor man high, basis the system of taxation in such a way that rich persons are taxed at a progressive rate. The system of modern taxation, is therefore, based on the law of diminishing marginal utility.