What is the Marginal Rate of Technical

Substitution (MRTS)?
The marginal rate of technical substitution (MRTS) is the measure with
which one input factor is reduced while the next factor is increased
without changing the output. It is an economic illustration that explains
the level at which one factor of input must decline. While maintaining
the same level of production, another factor of production is increased.
It shows how you can replace one input with another input without
altering the resulting output.

 
 

Summary
  The marginal rate of technical substitution (MRTS) examines
the level where one input can be replaced for another
resource with production remaining constant.
 The rate of one factor of production is decreased, and
another factor is increased while the output level is
maintained.
 When input utilization is optimal, the marginal rate of
technical substitution is equivalent to the cost of the inputs.

Understanding Marginal Rate of Technical Substitution

By substituting two input factors, the producer will need less amount of
money to achieve an equilibrium where the firm realizes maximum
profitability with minimum cost.

For example, the labor input can be decreased while the capital input
increased with the production level remaining constant. The MRTS
demonstrates the value by which one resource can be substituted with
another input of production without altering the level of output.

The formula for MRTS is as follows:

Where:

 MP is the Margin Product of each input

 Δ K/Δ L is the Capital that can be reduced
 K is the Capital
 L is the Labor

 
How MRTS Works

The marginal rate of technical substitution ascertains the amount of

cost which a specific input can be replaced for another resource of
production while maintaining a constant output. Therefore, the
marginal rate of technical substitution explains when a producer is
planning to replace one input of production with the next one.

The company may choose several combinations of inputs that can be

alternatively substituted to produce the same level of output. The pair
of inputs determined by the management must be able to achieve the
best results.

For example, when factor A can produce a maximum quantity of output

than factor B with the same cost incurred, the producer may end up
choosing factor A instead of B.

Principle of Marginal Rate of Technical Substitution

The marginal rate of technical substitution focuses on the rate at which

the producer combines two inputs of production and substitutes one
factor by decreasing it further upon every consecutive substitution.
Generally, the marginal rate of technical substitution specifies the rate
at which factors of production can be substituted without any change in
the unit of output.

For example, the MRTS of labor for the unit of capital is the inputs of
capital that can be switched with one input of labor with the output
level being constant.

The principle states that one input of production decreases with every
subsequent replacement by another factor of production. This decline,
combined with a constant level of output, is known as the principle of
diminishing marginal of technical substitution.

How Marginal Rate of Technical Substitution Diminishes

The marginal rate of technical substitution diminishes when the
producer keeps on substituting one resource of production with
another input of production. The following are the main factors as to
why the MRTS diminishes over time during production.

1. Scarcity of the factor of production

Continuous substitution of one factor of production with another one

causes inadequacy of the input of production being replaced. In this
case, the factor being substituted will not be able to deliver maximum
contribution for systematic production. Hence, although more inputs of
capital were made, the MRTS declined with successive substitutions.

2. Imperfect substitution of factors of production

It is impossible for two factors of production to substitute each other

perfectly since their usage in the production process is different.
Besides, if the two factors could substitute perfectly, a decrease or an
increase in either of them cannot cause any change in the MRTS.

The marginal rate of technical substitution allows the management to

determine the factors that can provide the highest cost-efficient
combination for producing a specific quantity of output and find a
production point where the combined factors are minimized to
decrease the cost of production.

MRTS Graph

An isoquant is a graphical illustration that explains how much input of

labor and capital will produce a constant output. The gradient of the
isoquant indicates the MRTS, any point along the slope specifies how
much labor will be required to replace a unit of capital at that
production point.

More Resources

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 Economics of Production
 Substitution Effect
 Marginal Cost of Production
 Economic Capital
What is the Marginal Rate of Technical Substitution?
The marginal rate of technical substitution (MRTS) is an economic theory that describes the
rate at which one factor will decrease to be able to maintain the same level of efficiency when
another factor rises.

The MRTS illustrates the gift-and-take between factors that enable a firm to maintain a
constant production, such as capital and labour. MRTS varies from the marginal rate of
substitution (MRS) since MRTS focuses on product balance and MRS focuses
on market equilibrium.

How to Calculate MRTS?

The MRTS is the slope of a graph representing one element on every axis. The slope of the
MRTS is an isoquant or a curve connecting the two input points as long as the output stays
the same.

The formula is as follows: MRTS(K,L): -( ∆K÷∆L) = MP(K)÷MP(L)

 K = Capital
 L = Labor
 MP = Marginal products of each input
 (∆K÷∆L) = Amount of capital that can be reduced when labour is increased (typically
by one unit)
Let's take a graphical illustration to understand the concept. An MRTS graph that has the
capital (depicted by K) on its Y-axis and labour (represented by L) on its X-axis is computed
as dK / dL.

The isoquant shape depends upon whether input values are exact substitutes, resulting in a
straight line, or complements, which creates an L shape. When input values are not precise
substitutes, the line is curved.

Uses and Application of MRTS

The isoquants in an MRTS graph display the rate at which the other can be substituted for a
given input, either labour or capital, thus retaining the same output level.

A decrease in MRTS along an isoquant is called the declining marginal rate of substitution
for generating the same level of output.

Producer equilibrium is a term in which all producers aim for the least amount of cost to
achieve the maximum amount of profit. By bringing output factors together in a combination
that needs the least amount of money, the producer gets equilibrium.

Therefore, the manufacturer is responsible for determining the combination of the factors of
production, which best achieve this result. The decision made by the producer relates to the
MRTS and the substitution principle.

It must be noted that only two factors of production are present in a plant, i.e. factor A and
factor B. The factor A can produce a higher quantity of output than factor B. It can be done
with an equal amount of capital being spent on both. It would result in the producer choosing
factor A for factor B instead.