Question

Answer the following question in $15$ sentences.
Write the importance of law of diminishing marginal utility.

Answer 1

The importance of the law of diminishing marginal utility is as follows :

(i) Helps to utilize resources economically : When the consumer purchases more units of a commodity, his marginal utility decreases. Due to this behaviour, the consumer cuts his expenditure on that commodity.

(ii) It has practical application : This law has a practical application in the field of public finance, as the principle of taxation is based on this law.

(iii) Base to other economic laws : The law of diminishing marginal utility is the base for other economic laws like law of demand, elasticity of demand, consumer surplus, the law of substitution etc.

(iv) Theory of value is based on this law : The theory of value is based on the law of diminishing utility. The value of a commodity falls with an increase in the supply of that commodity. This forms the basis for determining prices.

(v) Basis for ‘diamond-water paradox' : Adam Smith explained the famous ‘diamond-water paradox’ with the help of the law of diminishing marginal utility. Diamond is relatively less in supply. So, diamond has high marginal utility and high price. As water is relatively plenty in supply, it possesses low marginal utility and has low price though its total utility is very high. That is why, water has low price when compared to diamond though water is more useful than diamond.

(vi) It is basis for socialist plea : The law of diminishing utility is the basis for the socialist plea for an equitable distribution of wealth. The marginal utility of money to the rich is low. So* it is good that the Government should acquire surplus wealth and distribute the same to the poor, who have high marginal utility for money, by imposing direct taxes. Above are the practical benefits of studying the law of diminishing marginal utility.