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Practical Importance Of Law Of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility is the one of the most important laws in economics. Law of Demand, Law of  Equi-marginal Utility, Law of Consumer’s surplus and several concepts like Equilibrium in perfect competition, Determination of price etc. are developed on the basis of this law. Its practical importance is much worthy in consumers’ behavior. The practical importance of this law in Economics is explained as follows:

Practical Importance  Of Law Of Diminishing Marginal Utility

1. Taxation : This law is the basis of progressive taxation. As a person’s income increases, the rate of tax rises because the marginal utility of money to him falls down with arise in his income.

2. Price Determination: This law also acts as the basis of the theory of value. It explains the reasons for the decrease in the value of a commodity due to an increase in its supply.

3. Household expenditure: This law influences our day-to-day household expenditure. We avoid the purchase of a commodity when its marginal utility equals its price.

4. Downward sloping demand curve : The downward sloping demand curve is originated from this law. As marginal utility of a commodity falls due to an increase in its stock, demand for it also decreases. As a result the demand curve takes downward sloping form.

5. Value-in-use and Value-in-exchange : This law also explains tile difference between value-in-use and value-in-exchange. Air has great value-in-use but it has little value-in-exchange. Diamonds have great value-in-exchange but they have little value-in-use.

6. Redistribution Of Wealth: This law is advocated by the supporters of socialism who consider it proper to impose more taxes on the rich and less on the poor for redistributing the available national wealth.

7. Variety in consumption : This law explains the need for consuming a variety of commodities for the welfare of the consumers.

Thus, the practical importance of Law of Diminishing Marginal Utility in Economics is well accepted by all of us and by economists all over the world.

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