The Marginal Rate of Substitution (MRS) is the rate at which one commodity can be substituted for another, the level of satisfaction remaining the same. The MRS is given by the slope of the IC curve. The concept of marginal rate of substitution is an important tool of indifference curve analysis of demand. The rate at which the consumer is prepared to exchange goods X and Y is known as Marginal Rate of Substitution.
Let’s take a look at our indifference schedule given in the table below :
Gain in utility by an extra unit of good X
Loss in utility by an extra unit of good Y given
Since along in indifference curve, gain in utility from an extra unit of X is equal to loss of utility from units of good Y given up, therefore
It follows from above that marginal rate of substitution of good X for good Y is equal to the ratio of marginal utilities of the two goods.
