The marginal rate of substitution (MRS) quantifies the quantity of one good a consumer will sacrifice to get more of the other good.
– It is calculated by the slope of the indifference curve.
We will now add a fourth assumption with respect to consumer preference:
With an indifference curve there is a diminishing marginal rate of substitution.
Note the MRS for AB was 6, whereas that for DE was 2.
Marginal Rate of Substitution
Indifference curves are convex because more of one good is utilized, a consumer would prefer to sacrifice fewer units of a second good to obtain extra units of the first one.
Consumers select a balanced market basket
Perfect Substitutes and Perfect Complements
Two goods are perfect alternates when the marginal rate of substitution of one good for another is constant or stable.
Two goods are complements when indifference curves for the goods are maintained as right angles.