THE LAW OF DIMINISHING MARGINAL

RATE OF SUBSTITUTION (MRS)

Presented By:-
Preeti Yadav(50)
BBA First Sem
THE LAW OF DIMINISHING MARGINAL
RATE OF SUBSTITUTION (MRS)

 MRS is a rate at which units of two goods are

substituted each other to maintain the same level
of satisfaction.
According to ferguson,

“ The of diminishing marginal rate of substitution states that as

X is substituted for Y so as to leave the consumer on the same
indifference curve, the marginal rate of substitution of X for y
diminishes.”
Combination Rice (in units) Wheat (in MRS
of wheat and units)
rice
Explanation with illustration
A 5 10 _

B 6 7 3:1

C 7 5 2:1

D 8 4 1:1
Graphical Representation:
Causes for the operation of law of Diminishing Marginal Rate of Substitution
Substitution

(i) Imperfect substitution:

The MRS declines due to the fact that two goods are imperfect
substitutes of each other. Goods are imperfect substitutes of each other.
If two goods are perfect substitutes of each other then they are to be
regarded as one and the same good, and therefore increase in the
quantity of one decrease in the quantity of the other would not make any
difference in the marginal sacrifice of the goods.
Assumption of MRS:
The MRS diminishes also because of the
fact that the increase in the quantity of one good does not
increase the want satisfying power of the other. If with the
increase in the stock of good X, the want satisfying power of
good Y increases, then greater and greater amount of good Y
will be required to be given up for a unit increase in good X
so that consumer’s satisfaction remain same.
Changes in intensity of wants:

One of the characteristics of human wants is

that the want for a particular good is satiable
at a time. As the consumer has more and
more of a good, the intensity of his wants for
that good goes on declining.