# Marginal Rate of Substitution

## What is the 'Marginal Rate of Substitution'

The marginal rate of substitution is the amount of a good that a consumer is willing to give up for another good, as long as the new good is equally satisfying. It's used in indifference theory to analyze consumer behavior. The marginal rate of substitution (MRS) is calculated between two goods placed on an indifference curve, displaying a frontier of equal utility for each combination of "good A" and "good B". The marginal rate of substitution is always changing for a given point on the curve, and mathematically represents the slope of the curve at that point. MRS is calculated using the following formula:

Next Up

## BREAKING DOWN 'Marginal Rate of Substitution'

The Law of Diminishing Marginal Rates of Substitution states that MRS decreases as one moves down the standard convex-shaped curve, which is the indifference curve.

For example, a consumer chooses between hamburgers and hotdogs. In order to determine the marginal rate of substitution, the consumer is asked what combinations of hamburgers and hotdogs provide the same level of satisfaction. When these combinations are graphed, the slope of the resulting line is negative. This means that the consumer faces a diminishing marginal rate of substitution: the more hamburgers they have relative to hotdogs, the fewer hotdogs the consumer is willing to give up for more hamburgers. If the marginal rate of substitution of hamburgers for hot dogs is 2, then the individual would be willing to give up 2 hotdogs in order to obtain 1 extra hamburger.

The marginal rate of substitution does not examine a combination of goods that a consumer would prefer more or less than another combination, but examines which combinations of goods the consumer would prefer just as much. It also does not examine marginal utility – how much better or worse off a consumer would be with one combination of goods rather than another – because all combinations of goods along the indifference curve are valued the same by the consumer.

RELATED TERMS
1. ### Indifference Curve

A diagram depicting equal levels of utility (satisfaction) for ...
2. ### Substitute

A product or service that a consumer sees as comparable. If prices ...
3. ### Substitution Effect

The idea that as prices rise (or incomes decrease) consumers ...
4. ### Marginal Rate of Technical Substitution

The rate at which one factor has to be decreased in order to ...
5. ### Marginalism

The study of marginal theories and relationships within economics. ...
6. ### Same-Day Substitution

An offsetting change in a margin account, made over the trading ...
Related Articles
1. Markets

### Calculating the Marginal Rate of Substitution

The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
2. Markets

### What is an Indifference Curve?

An indifference curve determines the combinations of two goods that will provide equal satisfaction.
3. Markets

### What's a Substitute?

A substitute is a good that satisfies the same needs as another.
4. Markets

### Understanding the Substitution Effect

The substitution effect is an economic term used to describe consumer behavior relative to price or income changes.
5. Markets

### Explaining Marginal Utility

Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.
6. Markets

### Macroeconomics: Supply, Demand and Elasticity

By Stephen Simpson DemandDemand is driven by utility &#8211; the pleasure or satisfaction that a consumer obtains from consuming a good or service. Total utility is a function of the quantities ...
7. Markets

### A Practical Look At Microeconomics

Learn how individual decision-making turns the gears of our economy.
8. Markets

### Explaining Marginal Propensity to Consume

The marginal propensity to consume is a measure of how much consumption changes when income changes.
9. Markets

### Understanding Marginal Benefit

Marginal benefit is an economic term that describes the maximum amount a consumer is willing to pay for an additional unit of a good or service.
10. Markets

### What Is Supply?

Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
RELATED FAQS
1. ### How does marginal utility relate to indifference curves in microeconomics?

Discover how the economic concepts of marginal utility, ordinal preferences and indifference curves generate a unique way ... Read Answer >>
2. ### What does marginal utility tell us about consumer choice?

Learn how marginal utility influences consumer choice under the law of diminishing marginal utility and consumer decisions ... Read Answer >>
3. ### How can you find the demand function from the utility function?

Learn about how the utility function can be used to derive the demand function, and how both of these concepts relate to ... Read Answer >>
4. ### What's the difference between the substitution effect and the income effect?

Learn the difference between the income effect and the substitution effect in terms of spending money. Predict which direction ... Read Answer >>

6. ### Should a small business test the substitution effect on its products before launch?

Explore the substitution effect and find out how small businesses may evaluate how this principle impacts their own products. ... Read Answer >>
Hot Definitions
1. ### Frexit

Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
2. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
3. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
4. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
5. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...
6. ### Sell-Off

The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...