Marginal rate of substitution
Also called: MRS · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
The marginal rate of substitution (MRS) is the number of units of one good (say mangoes) a consumer is willing to give up to get one more unit of another good (bananas), while her total utility stays the same. It is the slope of the indifference curve without the minus sign:
MRS = |ΔY/ΔX|
It measures how much she personally values one good in terms of the other. At her best choice, MRS equals the price ratio p₁/p₂.
Example
Suppose a consumer moves from (1 banana, 15 mangoes) to (2 bananas, 12 mangoes) and feels just as well off. Then ΔY/ΔX = −3/1, so MRS = 3. She will give up 3 mangoes for one extra banana.
Don't confuse with
- Price ratio (p₁/p₂): the rate at which the market lets her swap one good for the other. MRS is the rate at which she is willing to swap.
Related concepts
- Ordinal utility analysis
- Indifference curve
- Law of diminishing marginal rate of substitution
- Convexity of indifference curve
- Perfect substitutes
- Monotonic preferences
- Indifference map
- Properties of indifference curves
- Utility function
- Revealed preference