What is Law of Diminishing Marginal Utility? What is its Importance?

>> Monday, January 18, 2010

Definition of Law of Diminishing Marginal Utility

Law of Diminishing marginal utility states that if other things remain constant and if consumer increases the consumption of any product, then marginal utility will decreasing and after sometime it will be negative.

For Example

Ram eats the bread. He is starting eating of bread from one. Then, he eats second and then third after eating third, he got satisfaction level, when he will eat fourth and fifth bread, his marginal utility will decrease and after eating seven, it may possible that he feel stomach ache for over eating, in economics, this is negative marginal utility.

Explanation of Law of Diminishing marginal utility

Make a graph on the graph paper. On the ox, show quantity and on the oy, show marginal utility

Eating of breads  marginal utility
1                               4  
2                               2  
3                               0  
4                              -4  

From above table, we find that marginal utility is decreasing as increasing of consumption of bread.

Importance of law of marginal utility

1. Base of Law of Demand

This law is very useful for telling the reason of why demand curve slop downward because, consumer will give less price, if he purchases new unit of same product, because he will get less utility by consuming new unit of same product. So, demand curve slop will be decreasing.

2. Base of Indian Income Tax

Indian income tax law's tax slab is progressive. It means higher tax will on high income and lower tax will be on lower income. Because, marginal utility will decreasing, if a person have more money and trend of his income is increasing year by year. So, there will no effect even higher tax with 30% rate will apply on Mukesh Ambani of such rich peoples.

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