Marginal Utility and Price

It is clear from the above discussion that marginal utility and price are inter-related. The two coincide or price measures marginal utility. The consumer stops where the price and the marginal utility are equa\. All units of the commodity being interchangeable, what is paid for the marginal unit is paid for every other unit. Therefore, we can say that marginal utility determines price. It is marginal utility marginal utility of money is less. Determiuatinn, The law explains why, with increase in its supply, the value of a commodity must fall. It thus forms a basis of the theory of value. As such its practical importance both to the general consumer and the businessman. can hardly be exaggerate.

C1uschuld Expenditure. The law of diminishing marginal utility governs our daily expenditure. Since we know that a larger purchase will mean lower marginal utility, we restrict our purchase of a particular commodity, because we cannot afford to waste our limited resources. We stop further purchases at a point where marginal utility equals price.

Duwnward Siuping Demand Curve. It is this law which tells us why demand curves slope downwards. It is due to this law thai smaller utility lines cut larger portions of the commodity line, i.e.. X-axis (see utility curve on page 52).

Value-in-Use amI Value-in-Ewhange. It also explains the divergence between value-in-use and value-in-exchange. Air has great utility (value-in-use) but little value-in-exchange, because it has no marginal utility.

Socialism, TIle socialists take stand on this la when they advocate the re-distribution of wealth in favour of the poor. TIle marginal utility to the rioh of the wealth. that they might lose, is not so great as the marginal utility of the wealth which is transferred  to the poor.

Some Laws. Some very important laws of Economics are based on the law of diminishing marginal utility, e.g., Law of Demand, the Concept of Consumer’s Surplus, the Concept of Elasticity of Demand, the Law of Substitution, etc. These laws and concepts have ultimately been derived from the law of diminishing marginal utility.