Question

Explain the importance of the Law of Diminishing Marginal Utility.

Describe the importance or usefulness of the law of diminishing marginal utility.

Examine the law of diminishing marginal utility, giving its importance.

Answer 1

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.