The law of diminishing marginal utility is considered as one of the basic laws of Economics. 

The importance of the law can be explained as under:

1. Basis of the Law of Demand: The law of diminishing marginal utility provides the function for various laws of consumption. The law of demand which is a very important law of consumption is based on the law of diminishing marginal utility. 

2. Basis of Equi-marginal Utility: The law of equity-marginal utility or the law of substitution is derived from the law of diminishing marginal utility. A consumer does not spend his total income on the purchase of one commodity alone, instead, he spends it on different commodities in such a manner as to ensure that the marginal utility obtained from every commodity purchased is in the same relationship to price.

3. Basis of Consumer’s Surplus: The utility derived by a consumer from each successive unit of a commodity goes on diminishing, though the price of the article remains unchanged. He stops his purchase at that point where the utility derived equals utility lost. Thus, the law of diminishing marginal utility is the basis of the concept of consumer’s surplus.

4. Indicates Relation between Standard of Living and Efficiency: The law of diminishing marginal utility helps us to understand the reason for a fall in the efficiency owing to a rise in the standard of living of the people.

5. Importance in the Field of Production: The law of substitution is based on the law of diminishing marginal utility. Accordingly, the factors of production can be substituted. The process of substitution is influenced by the prevailing prices of the factor of production. The dearer factors will be substituted by cheaper factors. The law of diminishing marginal utility will prove helpful to understand the law of substitution.

6. Theory of Taxation and Public Expenditure: Prof. Marshall utilized the law of diminishing marginal utility to build up his theory of taxation and public expenditure.

7. Public Finance: Modern governments follow the system of taxation so as to transfer the purchasing power from the richer sections of the society to the poorer section. This will help to achieve greater economic equity among the various sections of the society. Taxation and public expenditure is undertaken by the government are based on the law of diminishing marginal utility.

8. Importance in the Field of Exchange: When the supply of any commodity increases, its marginal utility decreases and the prices also come down. The commodities which are supplied largely have no value-in-exchange. Thus, the law has considerable importance in the field of exchange.