Marginal Rate of Substitution (MRS)

Marginal Rate of Substitution (MRS): It is the rate at which a consumer is willing to substitute good Y for good X.

$$MRS = \frac{\text{Loss of Good Y}}{\text{Gain of Good X}} \text{ or } -\frac{\Delta Y}{\Delta X}$$

Indifference Curve: is a curve showing different combination of two goods, 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 spending his income in such a way that he is getting maximum satisfaction.

Condition of Consumer’s Equilibrium:

Cardinal approach (Utility Analysis): According to this approach utility can be measured. “Utils” is the unit of utility.

Condition:

(i) In case of one commodity

$$MU_m = MU_x$$ [If $$MU_m = 1$$, $$MU_x = P_x$$]

Where,
MU_m = Marginal utility of money
MU_x = Marginal utility of ‘x’
P_x = Price of ‘x’

(ii) In case of two commodity.

$$\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m$$

and MU must be decreasing.

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