Significance of the Diminishing Marginal Utility

Significance of the Law :

In spite of the criticisms, the law of diminishing marginal utility is a very popular and an important law in Economics because of its universal application.

1) Usefulness to the consumers :

This law creates awareness among the consumers. To obtain maximum utility from the limited resources, it is necessary to ‘diversify’ the consumption.

2) Useful to the government :

The law is useful to the government in framing various policies such as progressive tax policy, trade policy, pricing policy etc.

3) Basis of paradox of values :

The law of diminishing marginal utility helps us to understand the paradox of values. It includes goods that have more value-in-use and zero or less value-in-exchange such as air, water, sunshine etc. as well as goods that have more value-in-exchange and less value-in-use such as gold, diamonds etc.

4) Basis of law of demand :

The law of demand is based on the law of diminishing marginal utility. According to the law of demand, the quantity demanded of a good rises with a fall in price and falls with an increase in price. When a consumer purchases more and more units of a good, its marginal utility steadily declines. Hence, he would buy additional units of a commodity only at a lower price.