Glossary term
Marginal Rate of Substitution (MRS): Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The marginal rate of substitution (MRS) is the amount of one good a consumer is willing to give up to obtain one more unit of another good while staying on the same indifference curve. It equals the absolute slope of the indifference curve and normally falls as the consumer has more of the second good.
In more detail
The MRS shows the consumer’s own valuation, while the price ratio shows the market’s. If the MRS exceeds the price ratio, the consumer values the extra good more than the market asks and should buy more of it. Choice settles where the two are equal, which is the point of tangency with the budget line.
Example
If a consumer will give up 2 units of tea for 1 more unit of coffee and stay equally satisfied, the MRS of tea for coffee is 2.
Key points
- MRS = absolute slope of the indifference curve.
- Diminishing MRS makes curves convex.
- At the optimum, MRS equals the price ratio.
Common mistake
Reading MRS as the price ratio. It reflects preferences, not market prices.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 2: Theory of Consumer Behaviour.