Marginal rate of substitution (MRS)
According to Prof. Bilas, “The MRS of X for Y is defined as the amount of Y the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction”.
If a consumer gets one more unit of one commodity, his satisfaction increases, but to maintain his satisfaction at the same level, he his to sacrifice some units of another commodity
If by obtaining one unit of commodity A, he is prepared to give up five units of the commodity B, and maintain his satisfaction at the same level, then five units of commodity B is the MRS for one unit of the commodity A.
Mathematically,
The marginal rate of substitution of Y for X
MRSyx = ∆X/ ∆Y (X=replaced, Y=added)
The marginal rate of substitution of X for Y
MRSxy = ∆Y/ ∆X (Y=replaced, X=added)
Combinations Cup of Tea Biscuits MRS fo T for B
A 1 50 –
B 2 38 1:12
C 3 28 1:10
D 4 21 1:7
E 5 17 1:4
The Marginal Rate of substitution for any commodity is always decreasing because consumers will be willing to forgo smaller and smaller units of the replaced commodity in order to have successive additional units of the added commodity. The reason for this can be summed up in the following points:
- Each particular want is satiable
As a consumer obtains more and more of one commodity, his intensity of need for it diminishes.
Thus, the consumer will be prepared to sacrifice less amount of the other commodity in order to obtain more and more of this commodity.
- Goods are an imperfect substitute for one another
If perfect, two will be the same.
Goods are complementary also.