Economics 12 Notes for Economics Notes

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Importance of the law of diminishing marginal utility

Importance of the law of diminishing marginal utility:

1. Basis of economic laws: Various laws of economics are derived on the basis of marginal utility. For example law of demand, law of substitution, concept of consumers’ surplus, etc.

2. Importance to the finance minister: This law helps finance minister to formulate fiscal policy. Finance minister impose high tax to the rich people and low tax to the poor people on the basis of the law.

3. Importance to consumer: This law is useful to consumer because by consuming the more units of commodity, satisfaction starts to decline. On the basis of this law consumer spends his/her money to purchase suitable quantity of commodity which maximizes his/her satisfaction.

4. Useful to reduce unequal distribution of wealth: This law is useful for the government to reduce the unequal distribution of wealth because marginal utility of wealth for poor is high and for rich is low. So to maintain M.U of wealth government imposes the progressive tax (i.e. high tax to rich and low tax to poor).

5. 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.

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