Law of diminishing marginal rate of substitution
Also called: Diminishing MRS · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
The law of diminishing marginal rate of substitution says this: as a consumer gets more of one good along an indifference curve, she gives up less and less of the other good for each extra unit. The marginal rate of substitution (MRS) is the amount of one good she will give up to get one more unit of the other while staying equally happy. The reason is simple. As bananas become plentiful, one more banana adds less satisfaction. As mangoes become scarce, each remaining mango matters more. This falling MRS makes the indifference curve convex to the origin, which means it bows inward.
Example
Class 12 Table 2.2 moves from (1 banana, 15 mangoes) to (2, 12), then (3, 10), then (4, 9). She gives up 3 mangoes for the 2nd banana, then 2 for the 3rd, then only 1 for the 4th. The MRS falls from 3:1 to 2:1 to 1:1.
Don't confuse with
- Law of diminishing marginal utility: this is about one good's extra satisfaction falling, with other goods held constant, and it uses utility in numbers. Diminishing MRS is about the trade-off between two goods and needs only ranking.
Related concepts
- Ordinal utility analysis
- Indifference curve
- Marginal rate of substitution
- Convexity of indifference curve
- Perfect substitutes
- Monotonic preferences
- Indifference map
- Properties of indifference curves
- Utility function
- Revealed preference