Marginal Rate of Substitution
 |
Definition of 'Marginal Rate of Substitution'The rate at which an individual must give up "good A" in order to obtain one more unit of "good B", while keeping their overall utility (satisfaction) constant. The marginal rate of substitution is calculated between two goods placed on an indifference curve, which displays a frontier of equal utility for each combination of "good A" and "good B".As such, the marginal rate of substitution is always changing for a given point on the indifference curve, and mathematically represents the slope of the curve at that point. |
 |
Investopedia explains 'Marginal Rate of Substitution'For example, consider an indifference curve between hamburgers and hot dogs at a picnic. If the marginal rate of substitution of hamburgers for hot dogs is 2, then the individual would be willing to give up 2 hamburgers in order to obtain 1 extra hot dog.The Law of Diminishing Marginal Rates of Substitution states that MRS decreases as one moves down on the standard convex-shaped curve, which is the indifference curve. The marginal rate of substitution is another way of mathematically expressing the opportunity cost for one more unit of something; in this case the opportunity cost is the giving up of some other specific good. |
Related Definitions
Articles Of Interest
-
Understanding Supply-Side Economics
Does the amount of goods and services produced set the pace for economic growth? Here are the arguments. -
How Influential Economists Changed Our History
Find out how these five groundbreaking thinkers laid our financial foundations. -
Cost-Push Inflation Versus Demand-Pull Inflation
Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services. -
Economics Basics
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! -
How Risk Free Is The Risk-Free Rate Of Return?
This rate is rarely questioned - unless the economy falls into disarray. -
Top 4 Most Scandalous Insider Trading Debacles
Here we look at some of the landmark incidents of insider trading. -
Nobel Winners Are Economic Prizes
Before you try to profit from their theories, you should learn about the creators themselves. -
The Nash Equilibrium
Nash Equilibrium is a key concept of game theory, which helps explain how people and groups approach complex decisions. Named after renowned mathematician John Nash, the idea of Nash Equilibrium ... -
The Copper King: An Empire Built On Manipulation
Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders. -
7 Controversial Investing Theories
We take a closer look at the theories that attempt to explain and influence the market.
Free Annual Reports