MARGINAL RATE OF SUBSTITUTION (MRS)

- In economics, the marginal rate of substitution (MRS) is the amount of a good that a
consumer is willing to consume compared to another good, as long as the new good is
equally satisfying. MRS is used in indifference theory to analyze consumer behavior.
When someone is indifferent to substituting one item for another, their marginal utility for
substitution is zero since they neither gain nor lose any satisfaction from the trade.

FORMULA AND CALCULATION OF THE MARGINAL RATE OF SUBSTITUTION (MRS)

The marginal rate of substitution (MRS) formula is:

MRS xy= dx/dy = MUx/MUy

where:
x,y =two different goods
dx/dy =derivative of y with respect to x
MU =marginal utility of good x, y

The marginal rate of substitution is a term used in economics that refers to the amount of one
good that is substitutable for another and is used to analyze consumer behaviors for a variety of
purposes. MRS is calculated between two goods placed on an indifference curve, displaying a
frontier of utility for each combination of "good X" and "good Y." The slope of this curve
represents quantities of good X and good Y that you would be happy substituting for one
another. MRS is a critical component for businesses to understand when analyzing
consumption trends or for government entities to understand when setting public policy.
Consider an example of a government wanting to analyze how offering electric vehicle
incentives may spur more environmentally-friendly purchases. Understanding how MRS is
impacted before and after a tax incentive can allow for the government to analyze the financial
implications of the plan.

BUDGET OR CONSUMPTION-POSSIBILITY LINE

- A budget or consumption-possibility line shows the various combinations of two products

that can be purchased by the consumer with his or her income, given the prices of the
products.

PURPOSE OF BUDGET
- Do not spend more than what you have.
 - It tracks the incoming and outgoing monies
- Individuals, households, businesses. and even government use budgets so that they
have at least a small amount of money left (savings) at the end of the month

For most of us, the idea of scarcity and trade-offs is something we experience in a very real way
when it comes to our own budget constraints. Most of us have a limited amount of money to
spend on the things we need and want. Another kind of budget constraint is time. For instance,
as a student, you only have twenty-four hours in the day to study, eat, sleep, and check
Facebook. An hour spent studying economics is an hour that can’t be used for sleep or play (or
something else). As a result, you have to make choices and trade-offs.

BUDGET CONSTRAINT
- refers to all possible combinations of goods that someone can afford, given the prices of
goods, when all income (or time) is spent.

CHANGE IN CONSUMER INCOME

- If the income of the consumer increases, the consumer has the ability to buy more or
higher combinations of goods. This will cause the budget line to shift to the right.
Conversely, if there is a decrease in income, budget line will shift to the left
REFERENCES:

https://www.investopedia.com/terms/m/marginal_rate_substitution.asp

https://courses.lumenlearning.com/suny-microeconomics/chapter/reading-budget-constraints-
and-choices/

APA