Marginal Rate of Substitution (MRS)

Marginal Rate of Substitution (MRS) : It is the rate at which a consumeris willing to substitute good Y for good X. MRS  Loss of Good Y or   Y Gain of Good X X

Indifference Curve : is a curve showing different combination of twogoods, each combinations offering the same level of satisfaction to the consumer. Characteristics of IC Indifference curves are negatively sloped.

Indifference curves are convex to the point of origin.

Indifference curves never touch or intersect each other.

Higher indifference curve represents higher level of satisfaction.

Consumer’s Equilibrium : It is a situation where a consumer is spendinghis income in such a way that he is getting maximum satisfaction. Condition of Consumer’s Equilibrium Cardinal approach (Utility Analysis) : According to this approachutility can be measured. “Utils” is the unit of utility.

Condition

In case of one community

MUmMuxIf MUm 1, MUx Px Px Where, MUm = Marginal utility of money MUx = Marginal utility of ‘x’, Px = Price of ‘x’ (ii)   In case of two commodity. MUx  MUy  MUm Px Py

and MU must be decreasing

Ordinal approach (Indifference Curve Analysis): According tothis approach utility can’t be measured but can be expressed in