Académique Documents
Professionnel Documents
Culture Documents
What do you understand by Marginal Rate of Technical Substitution. Why the same is negative? How the concept is significant from the viewpoint of managerial decision?
substituted for another as one moves down towards right along an Isoquant, while maintaining the total output constant. For example, the MRTS of input X and for input Y may be defined as the amount of input Y which can be replaced by one unit of input X so as to keep the level of output same. It is shown by the Absolute value of the slope of the isoquant.
FORMULA
Algebraically,
Where ,
amount of substitution increases. For example in the below diagram, as more and more labor is substituted for cloth, the increment of labor necessary to replace cloth increases.
The input substitution relation indicated by the slope of a production isoquant is directly related to the concept of diminishing marginal productivity.
The opposite is true when going in the other direction i.e. from right
to left
In this case it will be called as the MRTS of capital for labor In the unusual case of two inputs that are perfect substitutes for
If, on the other hand, there is only one production process available,
factor proportions would be fixed, and these zero-substitutability isoquant would be shown as horizontal or vertical lines.
MRTS IS NEGATIVE ?
Isoquant are convex to origin. The slope of the isoquant is decreasing in the
absolute magnitude from left to right The convexity of the Isoquant curve suggests that MRTS is diminishing.
SIGNIFICANCE
The MRTS recognizes that consumers' resources are limited and
particular goods is one of many measures that economists use when studying consumer preferences.
determinant of the overall demand for goods and services in the economy.
It will differ not only across individual consumers and firms, but also
THANK YOU!!