Marginal Rate of Substitution

Let's step back and think about an indifference curve in a little more detail. Looking at Figure 4, below, we see that indifference curve II gets flatter and flatter as we move down it from the left to the right. The other indifference curves are similar -- typically, the slope of an indifference curve changes, becoming flatter as we move from left to right.

Figure 4: The Slope of an Indifference Curve

What is this telling us? At 1 wing and 15 fries, the slope of the indifference curve is 10 -- that is, moving down the indifference curve, a reduction of one fry has to be compensated with 0.1 wing, in order to keep the consumer on the same indifference curve. (Remember, the scales on the two axes are different). As long as he is on the same indifference curve, the consumer is at the same level in his preference ranking -- no better and no worse off. Putting it another way, the consumer is willing to give up one fry to get another tenth of a wing (since the exchange leaves him no better and no worse off). The slope of the indifference curve tells us something very important -- how much of one good a person is willing to give up to get one more unit of the other good.

Economists have a term for the slope of an indifference curve. The term is the "marginal rate of substitution." What we have just seen is that, at 1 wing and 15 fries, the slope of the indifference curve is 10 -- meaning the consumer would give up only one-tenth of a wing to get one more fry. To summarize:

Definition: The Marginal Rate of Substitution: The marginal rate of substitution between two goods is (minus) the slope of an indifference curve for the two goods.
Interpretation: The marginal rate of substitution tells us how much of one good a person will give up to get one more unit of the other good.

We have also seen that the marginal rate of substitution varies in a specific way. As the consumer has more of a good (moving from left to right) the marginal rate of substitution decreases (the slope gets flatter). This "law" of decreasing marginal rate of substitution brings to mind the "laws" of diminishing marginal benefit and marginal utility. Indeed, it is the same law in another form.

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