# Marginal Rate of Substitution

Economists and producers use a theoretical tool called the Marginal Rate of Substitution to understand the actions of consumers who have to often choose between different products with their limited resources. Read ahead to know more.

Rahul Thadani

Last Updated: Jan 29, 2019

An Example

This concept will become clearer with the aid of an example. Suppose a customer walks into a store and has USD 10 to spend. Now with this money he can buy 8 loaves of bread and 2 eggs. Assume that 1 loaf of bread costs USD 1 and 1 egg costs USD 1.

Importance

It clarifies that the resources that the consumers have at their disposal are limited in nature. This means, the consumer has to make a choice between various goods. If he could obtain unlimited amounts of each product, this law would be useless in nature but this isn't feasible or realistic. Thus the concept of opportunity cost also arises in such a study.

Calculation Formula

In order to calculate the MRS for a particular product in relation to another, there is a specific formula at our disposal. The formula is as follows.

MRS = Change in product A/Change in product B

MRS = Change in product A/Change in product B

MRS = -1/1 = -1 = 1 (NOTE: The sign is ignored for the sake of convention)