The marginal rate of substitution is the rate at which a consumer of a particular product is willing to replace one good with another while still maintaining the same level of utility. A marginal rate of substitution, therefore, exists only with respect to at least two goods. The primary factors that cause a change in the marginal rate of substitution are price and quantity owned of a good or service.
Utility refers to the overall enjoyment or value a consumer gets from a particular good or service. The amount of utility a consumer derives from a good or service is specific to that consumer. For example, a fashion-conscious teenage girl might place a great deal of utility on a designer handbag, while a male blue-collar worker might place virtually no utility on this product. In economic theory, consumers strive to achieve the greatest possible utility with the limited resources they have.
Marginal utility is gained from consuming one extra unit of a good or service. For example, if a consumer has a fondness for chocolate and has already eaten one piece, his marginal utility for another piece of chocolate might be high. However, the more chocolate he consumes, the less he will crave another piece of chocolate, meaning his marginal utility is decreasing.
Abundance of One Good
An abundance of one good can cause the marginal rate of substitution to increase with respect to another. For example, if a consumer enjoys eating hamburgers and pizza and has an equal amount, a significant increase in the amount of hamburgers available to the consumer will cause the marginal rate of substitution for pizza to increase. This is because the marginal utility of pizza is reduced when its supply is greatly increased, while the marginal utility of hamburgers remains the same. Therefore, the consumer gains more utility from an additional hamburger than from an additional pizza.
Because consumers have limited resources, a change in price of one product will change its marginal rate of substitution relative to another product. For example, if a consumer receives equal utility from soda and juice, and the price of juice increases, the consumer's marginal rate of substitution for soda will increase, because the consumer can gain more overall utility by consuming the cheaper soda than the more expensive juice.
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