Published Oct 25, 2023 The Marginal Rate of Substitution (MRS) is an economic concept that measures the rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of satisfaction. It represents the amount of one good that a consumer is willing to sacrifice to obtain an additional unit of another good. To better understand the concept of MRS, let’s consider an example. Assume a consumer has a limited income and can only afford two goods: apples and oranges. The consumer initially has 4 apples and no oranges. As the consumer consumes more oranges, the satisfaction derived from each additional orange starts to decrease, while the satisfaction derived from each additional apple remains constant. The MRS represents the number of apples that the consumer is willing to give up to obtain one more orange while keeping the level of satisfaction unchanged. Initially, the consumer might be willing to give up 2 apples to obtain one orange (MRS = 2). However, as the consumer already has many oranges, the willingness to give up apples decreases, and the MRS might reduce to 1 apple for one additional orange. The concept of Marginal Rate of Substitution is important in consumer theory and decision-making. It helps economists understand how consumers allocate their limited resources among different goods to maximize their satisfaction. By calculating the MRS, economists can analyze how changes in prices or incomes affect consumers’ choices and preferences. Additionally, the MRS is crucial in the study of indifference curves and the determination of optimal consumption bundles.Definition of Marginal Rate of Substitution (MRS)
Example
Why Marginal Rate of Substitution Matters
Economics