Question

Explain the importance of the Law of Diminishing Marginal Utility.

Answer 1

The importance of the Law of DMU can be explained with the help of the following points:

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 the 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 the 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.