The marginal rate of substitution is basically referred to as the rate at which a consumer is willing to sacrifice some what quantity of Good 2 or good Y (which we called as good X2 or good Y) in return of good 1 or good X (which we called as good X1 or good X) and remains equally satisfied as he was with good X1 or good X.
Define marginal rate of substitution?
The marginal rate of substitution definition can be stated as the amount at which a consumer is keen to abandon a number of units’ good X for one more of good Y at the alike efficacy. So, it is mainly used to analyse the indifference curve that helps to study the behaviour of consumer. As we place the 2 goods i.e. good X and good Y or say good 1 and good 2 on the indifference curve and also place the utility and need on the same curve and study their behaviour.
click here – What Are The 5 Types Of Stocks Every Investor Should Own?
What Is MRS In Economics?
MRS economics can be referred to as the utility gained for good Y while you lose utility of good X. Therefore, MRS of Y and X is the change in X divided by change in Y at any point on the indifference curve.
Marginal Rate Of Substitution Formula:
The (MRS) marginal rate of substitution formula can be stated as follows:
- ∣MRSxy∣ = dx / dy = MUy / MUx
Where in the above formula,
- x, y = two different goods
- dx dy = derivative of y with respect to x
- MU = marginal utility of good x, y
Or you can also write down this formula as follows,
- Marginal Rate of Substitution of Good X for Good Y (MRSxy) = ∆ Y / ∆ X
Although, you should note that MRSxy and MRSyx are not the same, as they are the reciprocal of each other, as we represent MRSyx of them as,
- MRSyx = 1 / MRSxy
How to calculate marginal rate of substitution from a utility function?
You can derive the Formula of Marginal Rate of Substitution as we are given the quantities of goods involve utility function (U) for any consumer. So, here we assume that there are two commodities x1 and x2. Then
- U = f (x1, x2) = constant = U0.
Taking total differential, we get
d U = ∂ f / ∂ x1 . d x1 + ∂ f / ∂ x2 . d x2 = d U0 = 0
f x1 d x1 + f x2 d x2
– d x2 / d x1 = f x1 / f x2 = (∂ U / ∂ x1 ) ÷ (∂ U / ∂ x2) = MU x1 / MU x2
Here, we have the indifference curve slope as (d x2 / d x1) that also tells us the rate at which x1 must be substituted for x2 or vice versa.
Also, here The negative of the slope (- d x2 / d x1) is known to be as the marginal rate of substitution of x1 for x2.
click here – What Is Recoverable Depreciation?
What Is the Marginal Rate of Technical Substitution (MRTS) ?
The marginal rate of technical substitution (MRTS) is basically an economic theory that tells us the rate at which one factor must decrease to achieve the same level of satisfaction while we decrease the rate at which we consume another factor.
So, MRTS is basically give and take relationship, by which the firm can maintain constant output.
Marginal rate of technical substitution formula:
The (MRTS) marginal rate of technical substitution formula can be stated as follows:
- MRTS (L, K) = – Δ L / Δ K = MPK / MPL
Where in the above formula:
- K = Capital
- L = Labor
- MP = Marginal products of each input
- Δ L Δ K = amount of capital that can be reduced when labor is increased (typically by one unit)
The Indifference Curve represents the graph of 2 commodities i.e. commodity X and commodity Y that provides satisfaction to consumer.
Properties of Indifference Curve
- The difference curve has a negative slant.
- Indifferent curves do not intersect.
- They are convex from below, i.e., convex to the starting point.
- An indifference curve that lies to the right of another, yields more utility.
Types of Marginal Rate of Substitution:
- Diminishing MRS
- Constant MRS
- Increasing MRS
- Diminishing MRS
Diminishing MRS occurs when the consumer is willing to give up less and lesser amount of good Y in exchange of good X than the MRS obtained is diminishing one.
- Constant MRS
Constant MRS occurs when the consumer gives up 1 more unit of good Y to get one more unit of good X, so here exist perfect substitution resulting in constant MRS.
- Increasing MRS
Increasing MRS occurs when the consumer is willing to give up addition unit of good X at an increasing rate o that he can achieve the same level of satisfaction. Thus, here one can attain increasing marginal rate of substitution.
Marginal Rate Of Substitution Example:
By the use of following examples you will be able to understand calculations relating to Substitution of Marginal rate.
Graph representation of MRS:
In reference to the above graphical representation of image and indifference curve, we have 2 commodities of goods with us as, burger and pizza as good X and good Y or can also denote them by good X1 and good X2.
Here, the consumer must choose between pizza and burger. And in order to get the marginal rate of substitution the consumers choose between both the goods i.e. pizza and burger to provide them equal level of satisfaction.
So, with these combinations of both the goods the curve line is negative, that shows us diminishing rate of substitution.
In the above figure, when the consumer consumers 5 units of pizza he gets 31 units of burger, and 31 units of burger. And in order to have additional units of pizza he has to give up burger. Thus, in order to consumer 10 units of pizza, the consumer gives up some units of burger and consumer only 16 units of burger.
Case of additional units of Burger:
- At Point A: The consumer consumes 15 units of Pizza and 10 units of burger, so to consume additional units of burger the consumer gives up pizza and consumes only 10 units of pizza and get additional units of burger as 16 units instead of 10. So, he shifts at point B.
- At Point B: The consumer consumes 10 units of Pizza and 1 units of burger, so to consume additional units of burger the consumer gives up pizza and consumes only 5 units of pizza and get additional units of burger as 31 units instead of 16. So, he shifts at point C.
- At Point C: The consumer consumes 5 units of Pizza and 31 units of burger, so to consume additional units of burger the consumer has to give up pizza and will be getting additional units of burger that will provide him the same level of satisfaction.
Tabular representation of MRS:
Here, we have presented the following table showing different combinations of good X and good Y, to provide equal satisfaction to the consumer, as:
[table “8” not found /]
The above table shows us that the consumer is willing to give up three units of Good Y in order to get one additional unit of Good X. Therefore, at Point A in the above table the MRS of X for Y for the consumer is 3.
The amount of Y that consumer is willing to give up to get additional units or one additional unit of X in order to get the same utility and satisfaction is termed as MRS of X for Y. Here, while calculating MRS we assume that consumer gets the same level of utility at all points.
Key Points to notice:
- It involves 2 goods that consumer uses or consumes and they provide equal satisfaction to the consumer.
- It also involves substituting one good for the other good to provide equal MRS utility to the consumer i.e. giving one good for the consumption of other.
- It is the slope of the indifference curve that we notice at any point of IC curve.
- Indifference curve is a convex curve, showing consuming more of 1 commodity for another.
The following assumptions are applied to MRS as the utility of consumer changes, which are as follows:
- The consumer is rational and conversant to consume every unit of goods.
- All the goods are equal in size and shape.
- There is no time gap between consumption.
- There is no change in income, preference, taste, and fashion.
- Utility is cardinal.
- Marginal unit of money is constant.
Limitations to MRS formula:
This law of MRS doesn’t apply to the following conditions:
- When there exist dissimilar units.
- There exists unreasonable quantity of goods.
- There is unsuitable time period.
- In case of rare collections like coins, stamps etc.
- There is some change in taste and fashion of the consumer.
- In case of an abnormal person.
- When the income of the consumer is changing or fluctuating.
- In case of habitual goods.
- In case of durable and valuable goods.
Marginal rate of substitution calculator:
Here, we have mentioned marginal rate of substitution calculator that you can use to calculate MRS of goods with the final and initial number of units consumed and the initial and final total utility in order to find out the marginal utility of goods. So, you can use marginal rate calculator that will assist you to calculate marginal rate and save your time as well.
What Is Marginal Rate Of Substitution Class 12?
The Marginal Rate of Substitution (MRS) is determined as the rate at which a consumer is willing to exchange a number of units of good X for one more unit of good Y, at the same level of utility. It is thus determined by the preferences of the consumer.
What Is Mrs And MRTS In Economics?
The Difference Between the MRT and the Marginal Rate of Substitution (MRS) While the marginal rate of transformation (MRT) is similar to the marginal rate of substitution (MRS), these two concepts are not the same. The marginal rate of substitution focuses on demand, while MRT focuses on supply.
What Does MRP Mean In Economics?
Marginal revenue product
Marginal revenue product (MRP), also known as the marginal value product, is the marginal revenue created due to an addition of one unit of resource. The marginal revenue product is calculated by multiplying the marginal physical product (MPP) of the resource by the marginal revenue (MR) generated.
What Is The Purpose Of An MRP?
Material Requirements Planning (MRP) is a standard supply planning system to help businesses, primarily product-based manufacturers, understand inventory requirements while balancing supply and demand.
What Is The Meaning Of Marginal Rate Of Substitution?
What Is the Marginal Rate of Substitution (MRS)? In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to consume compared to another good, as long as the new good is equally satisfying. MRS is used in indifference theory to analyze consumer behavior
What Is Marginal Rate Of Substitution With Example?
The marginal rate of substitution (MRS) is the rate at which some units of an item can be replaced by another while providing the same level of satisfaction to the consumer. The MRS concept describes the relationship between the consumption of two goods or resources when consumers make rational decisions.
MRS is stated to as the utility gained for good Y while you lose utility of good X. Therefore, MRS of Y and X is the change in X divided by change in Y at any point on the indifference curve. Therefore, the formula for the same is as ∣MRSxy∣ = dx / dy = MUy / MUx. And also we have studies the different types of it as: diminishing MRS, increasing MRS and constant MRS that exist when the consumer is willing to sacrifice more or less of goods, that in all helps us to study marginal rate of substitution thoroughly.