MARGINAL RATE OF SUBSTITUTION

 Marginal Rate of Substitution

Marginal Rate of Substitution (MRS) is the rate at which a consumer is prepared to exchange goods X and Y. Consider Table-8. In the beginning the consumer is consuming 1 unit of food and 12 units of clothing. Subsequently, he gives up 6 units of clothing to get an extra unit of food, his level of satisfaction remaining the same. The MRS here is 6. Likewise when he moves from B to C and from C to D in his indiuerence schedule, the MRS are 2 and 1 respectively. Thus, we can define MRS of X for Y as the amount of Y whose loss can just be compensated by a unit gain of X in such a manner that the level of satisfaction remains the same.

The marginal rate of substitution of X for Y (MRSxy) is equal to MUx /MUy

We notice that MRS is falling i.e., as the consumer has more and more units of food, he is prepared to give up less and less units of clothing. There are two reasons for this.

1. The want for a particular good is satiable so that when a consumer has more of it, his intensity of want for it decreases. Thus, in our example, when the consumer has more units of food, his intensity of desire for additional units of food decreases.

2. Most goods are imperfect substitutes of one another. MRS would remain constant if they could substitute one another perfectly.

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GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. ALSO useful for B.Com / M.Com / MBA/ BBA/UPSC/ SSC and Various Govt Exams.!! This book is approved by Ministry of HRD Govt.of India as Students friendly book. Author Name- CA Harshita Raichandani and CA Dhananjay Ojha Book […]