Marginal Rate of Substitution (MRS):
The concept of marginal rate of substitution (MRS) was introduced by Dr. J.R. Hicks and Prof. R. G. D. Allen to take the place of the concept of Diminishing Marginal Utility. Allen and Hicks are of the opinion that it is unnecessary to measure the utility of a commodity. The necessity is to study the behavior of the consumer as to how he prefers one commodity to another and maintains the same level of satisfaction.
For example, there are two goods X and Y which are not perfect substitute of each other. The consumer is prepared to exchange good X for Y. How many units of Y should be given for one unit of X to the consumer so that his level of satisfaction remains the same? The rate or ratio at which goods X and Y are to be exchanged is known as the marginal rate of substitution. In the words of Hicks “The marginal rate of substitution of X for Y measures the number of units of Y that must be sacrificed for unit of X gained so as to maintain a constant level of satisfaction”.
Marginal rate of substitution (MRS) can also be defined as “the ratio of exchange between small units of two commodities, which are equally valued or preferred by a consumer”. It may here be noted that the marginal rate of substitution (MRS) is the
personal exchange rate of the consumer in contrast to the market exchange rate.
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