The concept of Marginal Rate of Substitution was introduced by Dr. Hicks
and prof.Allen to take the place’ of the idea of diminishing-marginal-utility. They
say that it is unnecessary to measure the utility of a commodity. The important
is the study of the behavior of the consumer as how the prefers one commodity to
another.
MARGINAL RATE OF SUBSTITUTION (MRSXY)
With the assumption of limited income, if a consumer purchase two
commodities (like X& Y) and wants to get some additional of one commodity
(say X); then he will have to decrease the units of other commodity (say Y). “the
ratio/rate of exchange between two goods “x” and “y” is name as ‘MRSxy”.
MRSxy Shows: How many units of good ‘Y’ a consume wants to give up for an
additional unit of good ‘X’ is called marginal rate of substitution (MRSxy
).
ESTHAM says: “marginal rate of substitution is the ratio between small
quantities of two commodities which are equally valued”.
Mathematically
MRSXY = ΔY/ΔX
The slope of indifference curve is represented by Marginal rate of
substitution.
MRSXY = slope of I.C. = MUX/MUY
|
Combin ations |
Units of Good ‘X’ |
Units of Good ‘Y’ |
MRSXY= ΔY/ΔX. |
Level
of Satisfa-ction |
|
A. |
1. |
13. |
---- |
K. |
|
B. |
2. |
9. |
4: 1. |
K. |
|
C. |
3. |
6. |
3: 1. |
K. |
|
D. |
4. |
4. |
2: 1. |
K. |
|
E |
5. |
3. |
1: 1. |
K. |
Law of diminishing MRSXY
“The Marginal-Rate-Of-Substitution between’ two commoditie’s, is decline
constantly”.
The principle of Diminishing MRSxy says that as the
consumer wants to get more units of commodity X he has to decrease the unit of
good X, he wants to los/sacrifice less and less units of good Y.
It is due to the reason as the stock of good X increases, the stock
of good Y decreases. Therefore he is wiling to give less units of Y for an
additional unit of X.
In the scheduled, MRS is decreasing , for 2nd unit of X,
consumer sacrifices 4 units of Y, for 3rd unit of X, consumer leaves
three units of Y and so on. At 5th unit consumer is just giving 1
unit of Y for 1 unit of X.
This diagram shows, as consumer move,s from 1combi-nation to the
next, the ΔY length becomes smaller&smaller, while the length of ΔX remains
same. At simply shows that for each additional unit of X, consumer is leaving
less and less units of good Y.