Technical Rate of Substitution

Technical rate of substitution measures the change in one

input. Such change gets adjusts in or to keep output constant.Suppose
that we are operation at some point(x₁, x₂) and that we consider giving
up a little bit of factor 1 and using just enough more of factor 2 to
produce same amount of output y. How much extra of factor 2, ∆x₂, do
we need if we are going to give up a little bit of factor 1, ∆x₁ ? This is
just the slope of the isoquant ; we refer to it as the technical rate os
substitution (TRS) , and denote it by TRS (x₁, x₂).

The technical rate of substitution measures the

tradeoff between two inputs in production.It measures the rate at
which the firm will have to substitute one input for another in order to
keep output constant. The formula of TRS can be derived in the same
idea as we determine the slope of the indifference curve. We should
consider the change in use of factors 1 and 2 that keeps output fixed.
Then we have,

∆y= MP₁ (x₁, x₂) ∆x₁+ MP₂ (x₁, x₂)∆x₂=0 ,

We can solve this to get

TRS(x₁,x₂)=∆x₂⁄∆x₁ = -MP₁(x₁ , x₂)⁄MP₂(x₁, x₂)

There is another way of deriving the technical rate of

substitution which is by figure .Technical rate of substitution measures
the change in one input. Such change gets adjust in or to keep output
constant. There are number of firms which are doing such practices.
They also adjust another input in production. Sometimes, firms only
hire labor for production. But strikes, labor union and labor disputes
force firms to use technology in production function.

Therefore, firms employ more capital and machinery as a factor of

production. It is interesting to understand how the firms substitute
labor for capital. Technology change among capital equipment
suppliers lower the cost over time of the firm’s increasing delivery
speed, using more flexible manufacturing methods, reducing the
probability of defects, reducing costs of redesign and controlling
production costs. While changing such composition some firms always
keep the output constant.

L
SLOPE=TRS

Y= f (x₁, x₂)

O K

Fig: production function with labor and capital

It can also be presented in terms of derivative of two factors of
production:

The above function shows the implicit fuction. The total

differential method may be used to calculate technical rate of
substitution.