What is the importance of Law of Demand?

1. Basis of the Law of Demand : The law of Demand is based on the consumers that they are prepared to buy a large quantity of a certain commodity only at a lower price. This results from the fact that consumption of additional units of a commodity reduces the marginal utility to him.

2. Basis of consumption Expenditure : The law of Demand and the law of equi-marginal utility both provide the basis for how the consumer should spend his income on the purchase of various commodites.

3. Basis of Progressive Taxation : Progressive Taxation is the system of Taxation under which the rate of tax increase with the increase in income. This implies that the burden of tax is more on the rich than on the poor. The basis of this is the law of Demand. Since it implies that the marginal utility of Money to a rich man is lower than that to a poor man.

4. Diamond-water paradox : This means that through water is more useful than diamond. Still the price of diamond is more than that of water. The explanation lies in law of diminishing marginal utility. The price of commodity is determined by its marginal utility. Since the supply of water is abundant the marginal utility of water is very low and so its price. On the contrary, supply of diamond is limited so the marginal utility of diamond is very high, therefore the price of diamond is very high.

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