Explain, with reason,whether you Agree or Disagree with the following statement :
Law of Diminishing Marginal utility is important in practice.
Yes, I agree with this statement.
Importance or Significance of the law in practice are as follows:-
- To the consumer - The law of diminishing marginal utility guides the consumer in planning their budget, so as to achieve maximum satisfaction from the resources available.
- To the producer - The law is important to the producer in determining price and sales policy. It helps to maximise his profits.
- To the monopolist - The law of DMU is helpful to the monopolist to practice price discrimination, i.e., charging different prices to different consumers for the same product.
- To the government - The law of diminishing marginal utility is useful to the government to implement various economic policies like public distribution system, social justice, etc. It helps to improve the welfare of the people in the society.
- To the finance minister - The law of diminishing marginal utility guides the finance minister to frame progressive taxation policy. It helps to reduce economic inequality. The law is also useful to economic experts, bankers and modern economists.
- To understand paradox of value - The law explains 'value paradox' by showing the difference between value in use and value in exchange. Value-in-use refers to usefulness of a commodity. Whereas value-in-exchange means rate. of exchange of one commodity in terms of another.
Some commodities have high value-in-use but low exchange value, for example water. Whereas some commodities have low value in use but high exchange value due to its scarcity. For example diamonds. Higher TU determines greater value in use and higher MU denotes greater value in exchange. of a commodity.
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- Law of Equi-marginal Utility