The law of diminishing marginal utility is of great importance in economics:
1. Basis Of Economic Laws
Several very important laws of economics are based on the law of diminishing marginal utility e.g. the law of demand, consumer's surplus, elasticity of demand, the law of substitution, etc.
2. Basis Of Theory Of Taxation
The law of diminishing marginal utility is applicable in the sphere of taxation. As a person's income increases, the rate of tax rises because the marginal utility of money to him falls with the rise in his income. The principle of progressive taxation is based on this law.
3. Basis Of Price Determination
This law also applies to the determination of market price. The price of a commodity falls when its supply increases. It is because with the increase in the stock of a commodity, its marginal utility decreases..
4. Basis For Consumer Expenditure
The law of diminishing marginal utility regulates our daily expenditure. We know that as we go on buying more of a commodity, its marginal utility falls.Having only a limited amount of money at our disposal, we cannot waste it unnecessarily on a large quantity of a particular commodity. Therefore, we stop further purchases at a point where marginal utility equals price.
5. Basis Of Distribution Of Wealth
According to socialists, the distribution of wealth and national income should be done on the basis of this law. They argued that excessive wealth in the hand of rich is not so useful from the social point of view. The excess wealth should be transferred to the poor. In the hand of poor, it will satisfy needs that are more urgent. It is due to diminishing marginal utility that beyond a certain point, wealth will have less utility
.of a rich man. If it is transferred to the poor, it will have greater utility.
