A dummy is a model or a replication of something. It is something designed to substitute something real. For instance, a mannequin is used to model a human being while also a dummy phone can be used to model a real phone. However, when someone is called a dummy, it can be an offensive, abusive, and demeaning remark on that person.
It simply means that person is stupid, foolish, has no common sense at all, and is habitually silent. It is associated with the fact that dummies do not talk and do not understand anything but can only be tossed around.
To call someone a dummy is rude, offensive, and hurts. It is not advisable to address other people with such words.