Marginal Rate Of Transformation

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DEFINITION of 'Marginal Rate Of Transformation'

The rate at which one good must be sacrificed in order to produce a single extra unit (or marginal unit) of another good, assuming that both goods require the same scarce inputs. The marginal rate of transformation is tied to the production possibilities frontier (PPF), which displays the output potential for two goods using the same resources. To produce more of one good means producing less of the other because the resources are efficiently allocated.

The marginal rate of transformation is the absolute value of the slope of the production possibilities frontier. For each point on the frontier (which is displayed as a curved line), there is a different marginal rate of substitution, based on the economics of producing each product individually.

BREAKING DOWN 'Marginal Rate Of Transformation'

The marginal rate of transformation allows economists to analyze the opportunity costs to produce one extra unit of something; in this case the opportunity cost is represented in the lost production of another specific good. Generally speaking, the opportunity cost rises (as does the absolute value of the marginal rate of transformation) as one moves along (down) the PPF; as more of one good is produced, the opportunity cost (in units) of the other good increases.

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