The marginal rate of substitution - what is it?

Everything in life has to choose.Go out dancing or to the gym, wear a skirt or trousers (men certainly easier), buy yogurt or cottage cheese dessert?All of these processes have long observed the specialists of different branches: sociology, psychology, marketing, and just economists.

In microeconomics, there is a theory of the marginal rate of substitution.By definition, it is the quantity of goods of the same type on which the buyer agrees to renounce in favor of the purchase of another product.Let's talk not abstractly about this phenomenon.

Microeconomics Why?

Translated from the Greek "microeconomics" - the laws of farming "small houses".The problems of production, consumption and choice of resources by enterprises of different ownership forms and simple household - that is the subject of interest in microeconomics.

this theoretical science, but it allows to explain almost all the economic processes taking place in society.

The main areas of interest are called microeconomics:
• consumer problems.
• The problem of the manufacturer.
• Questions market equilibrium.
• The theory of public goods.
• the impact of the external environment.

concept of "marginal rate of substitution of goods" refers just to the sphere of microeconomics problems and makes it quite easy to answer the questions.

utility theory

Utility theory explanation says that buying each unit of a product, the consumer meet their needs.So, it becomes a little happier.Aspirations of all professionals in the world ultimately aimed at making people happier.

Currently, while there are utility theory: cardinal and ordinal.The first suggests that the utility of consumption goods can literally count.This theory is sometimes called the quantity theory of utility.Supporters argue that the utility of consumption goods measured in units - utility.

second, ordinal or relative utility theory argues that compares the benefit of the consumer (utility) consumption of goods with the same benefit from the consumption of the other.Roughly speaking, each time choosing between a cup of coffee and a bun with a hamburger and cola, we decide what will be more useful at the moment.As part of the relative theory of utility and appeared marginal rate of substitution.


Determination

In a world tends to equilibrium.Our range of products - is no exception.Buying one thing, we consciously reject the other.At the same time we are confident that purchased will be more useful than the left on the shelf.The marginal rate of substitution of products gives us an understanding of how some "products" is more important than others.Of course, each of us has their own preferences and priorities.But the economy is a subjective view is not suitable.We need a generalized approach.

marginal rate of substitution is equal to the relative change in the number of goods consumed.The formula is written as follows: MRS = (y2 - y1) / (x2 - x1).

Changing consumption (use) of goods X and Y allows us to make conclusions about the preferences of the consumer, as well as talk about the value of their goods.The only factor that can be measured in theory the choice of product is its price.All other characteristics of the product and the reasons for its choice are very subjective.In an attempt to replace one other consumer goods aims to keep financial costs at the same level.A better - and reduce consumption spending.


indifference curves Indifference curves illustrate the various sets of goods that the consumer acquires.This stipulates that consumers do not care what product to choose.For example, a choice between apples and oranges, public transport or commercial routes.On the axes of the plane compared items displayed number (X-axis, such as tea cups and the axis Y - biscuits).



eventually curve, we see exactly from how many apples ready to give the customer the benefit of buying one extra orange.And vice versa.In the case where each currency is equally useful when buying comparable goods, talking about the utility maximization and rational distribution of the budget of the consumer, ie. E. Achieved marginal rate of substitution.Further monitoring of the adoption process a consumer buying decisions show that, if the value is less than the cost of 1 apple 1 orange, the consumer will choose the apple.


general theory of rational consumption

indifference curves generally reflect equal to marginal utility.But note that if the marginal utility of commodity X is twice the price, and the goods have - three times.The consumer goes to buy goods from, even without regard to the fact that it is more expensive.


This will cause a redistribution of the total budget, t. To. At the cost of goods will rise.The marginal rate of the utility in this case achieved "effect rationalism" buyers who want to get the maximum benefit from the purchase.A rational buyer constantly assesses the situation on the market, and remaps the direction of spending.


Particular cases of marginal utility The economy

distinguish the so-called conventional products, substitute products and complement goods.The first - partly substitutable products (water and fruit compote), the second - completely replace each other ("Coca-Cola" and "Pepsi-Cola"), and others - products that complement each other (pen and pin it).

For all reported cases of marginal rate of substitution of goods is private (exclusive) case.Thus, in general, a curve with a negative slope, and convexity in the direction of the axes start, then substitutes a graph becomes a straight line intersecting axes.The angle of this line depends on the prices of goods, while the degree of concavity of the curve is determined by the possibility of substitution of one product by another.


factors of production and the rate of substitution

As in the private sector, businesses, economists are trying to track the utility purchased and consumed resources.In this case, the calculated marginal rate of technical substitution.Unlike in the consumer goods market, enterprises monitor changes in one factor of production to increase (decrease) in the other.The limitation acts as the volume of production - it should remain unchanged.

most common indicator - the marginal rate of substitution of capital for labor.You can invest in the production of additional funds, not paying attention to changes in labor.But in this case it stated that at some point there will come a decrease of production, t. To. To remain on the same indifference curve, you must increase to compensate for the decrease of one factor else.Such a situation is contrary to the production of the marginal product.Therefore, companies have to find a balance between the factors of production.

marginal rate of substitution of factors of production - a key indicator for calculating the economic efficiency of enterprises.


How are the marginal utility and the rate of substitution?

course, every product benefit.Up to a point each following unit of goods also brings additional benefits.But at some point it's consumption capacity of something one ceases to benefit.Then we talk about reaching the marginal utility of goods.

If you stay on the same indifference curve and move it in any direction, then we can talk about compensation for utility goods: a decrease in consumption leads to an increase in the consumption of another;total utility is not changed.Additional utility is regarded as marginal utility of each product.The formula is written as follows: MRS = Py / Px.

Properties marginal rate of substitution

• Indicator marginal rate of substitution - is the ratio of the marginal utilities of the two goods.

• A negative value marginal rate of substitution means that a reduction in the consumption of goods automatically causes an increase in the use of the other.

• The marginal rate of substitution is considered only when moving up and down the indifference curve.

• All of the above is "working" just for general cases (partially interchangeable products);for all private options for this feature is not considered.