Microeconomics Session 3

This is the 3rd session of microeconomics-

EC-3501 and EC-3101. This session is
equivalent to 2 uninterrupted classes

These slides are made by Prof. (Dr) P. J. Des 1

ai for her students. They should not be copi
 Marginal Rate of Substitution and Why it
Diminishes?
• Marginal rate of substitution of good X for
good Y (MRSXY ) is the sacrificed amount of Y
whose utility loss can just be compensated by
a unit gain in X.
• It is the amount of Y which a consumer has to
give up for the addition of an additional unit
of X so that she remains on the same IC (so
that the satisfaction level of the consumer
remains the same).
These slides are made by Prof. (Dr) P. J. Des 2
ai for her students. They should not be copi
 Schedule
Combination/ Immunity Boosters Sanitizers Marginal rate of
Basket substitution (MRS)
A 1 16
B 2 10 6
C 3 6 4
D 4 4 2
E 5 3 1

We observe that marginal rate of substitution is diminishing.

These slides are made by Prof. (Dr) P. J. Des 3

ai for her students. They should not be copi
• When the consumer moves from point A to B, she
gives up 6 units of sanitizers for one more unit of
immunity booster.
• And, from point B to C she gives up 4 units of
sanitizers for one extra unit of immunity boosters
then 2 and subsequently 1.
• In other words, the rate at which the consumer is
willing to give up sanitizers (good Y) for an extra
unit of immunity boosters (good X) diminishes
from 6 to 4 to 2 to 1.
These slides are made by Prof. (Dr) P. J. Des 4
ai for her students. They should not be copi
 Diagram

These slides are made by Prof. (Dr) P. J. Des 5

ai for her students. They should not be copi
These slides are made by Prof. (Dr) P. J. Des 6
ai for her students. They should not be copi
 Logic Behind DMRS
1) Want for a particular good is satiable at a given time and hence marginal utility
diminishes:
In the table, the consumer is initially consuming only one unit of immunity
booster and 16 units of sanitizers.
• Hence, marginal utility from immunity boosters is higher and that from
sanitizers is lower. (The psychological value of things we have in abundance is
lower and that of goods which we own in lesser quantity is higher.)
• As we increase the consumption of immunity booster from one unit to two
units, the consumer is willing to give up 6 units of sanitizers to gain additional
total utility from immunity boosters.
• She gives up sanitizers in an amount whereby loss of total utility from
sanitizers =gain of total utility from an additional unit of immunity booster.
• Remember: The total utility from the two goods should remain the same
because the different points are on the same indifference curve (a IC is a iso
utility curve)
These slides are made by Prof. (Dr) P. J. Des 7
ai for her students. They should not be copi
• Now when she adds the third unit of immunity
booster, the addition to total utility is lower than
that of the previous unit. (Law of DMU applies)
• While the MU lost by sacrificing the 10th unit is
definitely higher than the MU lost when the
consumer sacrificed the 16th unit.
• So this time in order to gain additional total utility
by consuming one more unit of immunity booster,
the consumer is willing to give up lesser units of
sanitizers than before.
These slides are made by Prof. (Dr) P. J. Des 8
ai for her students. They should not be copi
2) Two goods are not perfect substitutes of each other:
Good X is not a perfect substitute of good Y.
(Immunity boosters are not substitutes of sanitizers) If
these goods were perfect substitutes then increase in
the quantity of one good and decrease in that of the
other would not matter to the consumer. The want of
good Y can be perfectly satisfied by good X and the
consumer would be able to sacrifice same amount of
Y for an additional unit of X each time.

These slides are made by Prof. (Dr) P. J. Des 9

ai for her students. They should not be copi