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Importance of the Law of Diminishing Marginal Utility

Consumer behavior

The major points of importance the law of diminishing marginal utility are as follows:

 1. Basis of Economic Laws:
The Law of Diminishing Marginal Utility is the basic law of con­sumption. The Law of Demand, the Law of Equi-marginal Utility, and the Concept of Consumer’s Surplus are based on it.

2. Diversification in Consumption and Production:
The changes in design, pattern and pack­ing of commodities very often brought about by producers are in keeping with this law. We know that the use of the same good makes us feel bored; its utility diminishes in our estimation. We want variety in soaps, toothpastes, pens, etc. Thus, this law helps in bringing variety in consumption and production.

3. Value Theory:
The law helps to explain the phenomenon in value theory that 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 diminishes. 

4.  Price determination:
This law is useful to determine the price. Basically price of commodity depends on utility so if seller wants to sell more quantity he must reduce the price or for more quantity to sell a unit price is low.

5.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 for him/her falls with the rise in his/her income. The principle of progressive taxation is based on this law.