Importance of Diminishing Marginal Utility

Importance of Diminishing Marginal Utility:

1) The Law of Diminishing Marginal Utility (i.e., DMU) is the base for several other economic laws. For illustration, the Law of Demand is the outcome of the operation of the Law of Diminishing Marginal Utility. In another words, as more and more units of a commodity are utilized, each of them provides less and less marginal utility. This is due to the operation of Law of DMU. Since utility falls, consumer is thus willing to pay a lower price merely.

2) The Law of DMU functions in the situation of money also. A rich man already possesses numerous money. When more and more money is recently added to his income, marginal utility of money starts to fall. Alfred Marshall supposed that the marginal utility of money stays constant.

3) This law is a handy instrument for the Finance Minister for rising tax rate on rich people.

4) Producers are guided by the function of the Law of DMU, unconsciously. They constantly modify the design, the package of their goods and hence the goods become more attractive to the consumers and they emerge as ‘new goods’. Otherwise, the consumers would think that they are employing similar commodity, over and over. In such a condition, the Law of DMU functions in the minds of consumers. Demand for such commodities might fall.

 

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