What Is the Marginal Rate of Substitution?

Marginal Rate of Substitution (MRS) means that two items can be replaced at a certain rate, and while maintaining the same level of satisfaction (that is, on the same indifference curve), consumers add one unit The amount of consumption of another item that needs to be abandoned. The marginal substitution rate can be represented graphically by the slope of the line connecting two points on the indifference curve. ^[1]

Marginal substitution rate

For example, the two products that are completely replaced have a constant marginal substitution rate.

Decreasing MRS

The law of diminishing marginal substitution rate of a commodity refers to: under the premise of maintaining the same level of utility, with the continuous increase in the consumption of a commodity, consumers are willing to give up another unit to obtain each unit of this commodity. The consumption of goods is decreasing.

The reason for the diminishing marginal substitution rate is that with the gradual increase in the consumption of a commodity, the consumer's desire to obtain more of this commodity will diminish. Therefore, in order to obtain an additional unit of this commodity, And the number of other commodities willing to give up will be less and less.

In a geometric sense, since the marginal substitution rate of the product is the absolute value of the slope of the indifference curve, the law of decreasing marginal substitution rate determines that the absolute value of the indifference curve is decreasing, that is, the indifference curve is convex toward the origin. .