A marginal rate of substitution is basically defined as the rate over which a consumer gets able to pay some amount of money. The amount is paid due to the exchange of one good from another. We exchange it for the maintenance of the exact same level of utility.
In this article, I will briefly explain that what does Marginal Rate of substitution convey and tell you. I will also mention the formula that is used for the Marginal Rate of Substitution. You will also study the key takeaways of the Marginal Rate of Substitution (MRS. I will also list down the limitations that are applied to the marginal rate of substitution (MRS).
What is the Marginal Rate of Substitution (MRS)?
In the vast field of economics, a Marginal rate of substitution is basically considered as an amount of good that a consumer pays from his will and wish for the purpose of another good. The amount is paid only when the newly buying good is satisfying the user.
The Marginal Rate of substitution (MRS) is basically the theory of indifference. This theory of indifference is used for analyzing the behavior of a consumer. The Marginal Rate of Substitution (MRS) can be calculated only when the two goods are placed on the curve of an indifference. The curve basically displays a frontier of an equal utility for the combination of each of the good “A” and good “B”.
The formula for the Marginal Rate of Substitution (MRS):
The formula used for the Marginal Rate of Substitution (MRS) is mentioned below:
èX and Y basically represent two different goods.
èDy/Dx is referring to the derivatives of y with respect to the x.
èMU basically refers to the marginal utility for each of the good.
What Does the Marginal Rate of Substitution (MRS) Actually Tell you:
The Marginal rate of Substitution is the term that is widely used in economics. This term widely refers to the point where one good must be substitutable for the other good. It basically forms a curve which is sloping downward. It also represents the goods in terms of their quantities.
What are the Key Takeaways for the Marginal Rate of Substitution (MRS)?
1. The Marginal rate of substitution is an amount of a good that a consumer wishes to pay from his will but only when the other or a new good is satisfying them equally.
2. A downward sloping curve will be formed which is called as an indifference curve.
3. An indifference curve along with any given point, its MRS is the slope of indifference at that given point.
What are the Limitations for Marginal Rate of Substitution (MRS)?
1. The Marginal rate of substitution won’t examine the goods combination. It would rather prefer that what a consumer prefers more or less in comparison with any other combination. It would examine the combination of good that will equally satisfy consumer needs.
2. It does not examine the term i-e Marginal Utility.