CRITICISM AND SIGNIFICANCE OF LAW OF DIMINISHING MARGINAL UTILITY

•    CRITICISM AND SIGNIFICANCE OF LAW OF DIMINISHING MARGINAL UTILITY
FOR CA AND CS FUNDAMENTAL ECONOMICS

CRITICISM

1. MEASUREMENT OF THE UTILITY IS NOT POSSIBLE : BUT UTILITY OR SATISFACTION REFERS TO STATE OF MIND AND IS INCAPABLE OF BEING MEASURED.
2. MARGINAL UTILITY OF MONEY DOES NOT  REMAIN CONSTANT:AS THE STOCK OF MONEY DECREASES THEN UTILITY INCREASES AND VICE VERSA
3. UTILITY IS NOT RELATIVELY INDEPENDENT: IT IS AFFECTED BY CONSUMPTION OF OTHER GOODS
4. DOES NOT SPECIFY AT WHAT RATE MARGINAL UTILITY DECLINES

5. BASED ON UNREALISTIC ASSUMPTIONS:
1. FASHION,TASTE ,HABITS ,INCOME ARE NOT CONSTANT
2. MARGINAL UTILITY OF MONEY IS NOT CONSTANT
3. UTILITY CAN NOT BE MEASURED

• SIGNIFICANCE OF THE LAW

• BASIS OF THE LAW OF CONSUMPTION:PROVIDES THE FOUNDATION OF VARIOUS LAWS OF ECONOMICS

1.       EQUI MARGINAL UTILITY: A CONSUMER DOES NOT SPEND ALL HIS INCOME ON ONE COMMODITY  . TO GET THE MAXIMUM SATISFACTION HE SPENDS HIS LIMITED INCOME IN SUCH A WAY THAT THE LAST UNIT OF MONEY SPEND ON DIFFERENT GOODS YIELD EQUAL SATISFACTION

2.       BASIS OF THE LAW OF DEMAND: BASED ON LAW OF DIMINISHING MARGINAL UTILITY. MORE QUANTITY IS PURCHASED AT LOW PRICE BECAUSE MARGINAL UTILITY OF THE ADDITIONAL UNITS BECOME LESS AND LESS. SO THE CONSUMER WILL BE READY TO PAY LESS PRICE

3.       BASIS OF CONCEPT OF CONSUMER’S SURPLUS:-A CONSUMER PURCHASE AS MANY UNITS OF A COMMODITY,THE MARGINAL UTILITY OF WHICH IS EQUAL TO PRICE. IN THIS WAY THE CONSUMER OBTAINS SOME SURPLUS UTILITY FROM THE EARLIER UNITS.CALLED CONSUMER’S SURPLUS.

• BENEFICIAL TO CONSUMER-IT HELPS THE CONSUMER TO PLAN HIS EXPENDITURE.FROM THIS LAW HE LEARNS THAT HE SHOULD NOT PURCHASES MORE OF THE SAME COMMODITY RATHER SHOULD BUY SOME UNITS OF SOME OTHER COMMODITIES
• VARIETY IN PRODUCTION:-IT IS BECAUSE OF THE APPLICATION OF THE LAW OF DIMINISHING MARGINAL UTILITY VARIETY IN PRODUCTION IS FOUND
• THE LAW HELPS IN PRICE DETERMINATION: THE LAW OF DIMINISHING MARGINAL UTILITY HELPS IN PRICE FIXATION
• DIFFERENCE IN VALUE IN USE AND VALUE IN EXCHANGE:  IT EXPLAINS DIAMOND WATER PARADOX  WHICH WAS NOT FULLY EXPLAINED BY ADAM SMITH. WHY VALUE OF DIAMOND IS MORE THAN WATER BUT UTILITY OF WATER IS MORE THAN DIAMOND.ADAM SMITH EXPLAINED  AND DIVIDED VALUE IN TWO PARTS :

1. VALUE IN USE AND VALUE IN EXCHANGE
2. GOODS HAVING MORE VALUE COMMAND LOW PRICE AND GOODS HAVING MORE VALUE IN EXCHANGE HIGH PRICES, BUT DID NOT TELL ANY REASON FOR IT.

·         NEO CLASSICAL ECONOMISTS EXPLAINED ON THE BASIS OF MARGINAL UTILITY. ACCORDING TO THEM THERE IS ABUNDANCE SUPPLY OF WATER AND SO THEIR MARGINAL UTILITY FALL QUICKLY AND PRICE ALSO ON THE OTHER HAND DIAMOND ARE LIMITED AND HAVE MORE VALUE IN EXCHANGE AND SO THEIR MARGINAL UTILITY FALLS SLOWLY AND THE COMMAND HIGH VALUE

• BASIS OF PROGRESSIVE TAXATION:
• THE SYSTEM  OF PROGRESSIVE TAXATION WHICH LEVIES HIGHER TAXES ON HIGHER INCOME AND LOW TAXES ON LOW INCOME IS ALSO BASED ON THE APPLICATION OF LAW TO MONEY SINCE THE MARGINAL UTILITY OF MONEY TO THE RICH IS LESS AND SO THEY ARE TAXED MORE AS COMPARED TO POOR WHOSE MARGINAL UTILITY IS MORE
• BASIS OF REDISTRIBUTION:WEALTH IS DISTRIBUTED IN FAVOUR OF THE POOR THE TOTAL WELFARE OF THE NATION WILL INCREASE.