Production Theory - The Marginal Rate of Technical Substitution

The Marginal Rate of Technical Substitution


Marginal Rate of Technical Substitution

Isoquants are typically convex to the origin reflecting the fact that the two factors are substitutable for each other at varying rates. This rate of substitutability is called the “marginal rate of technical substitution” (MRTS) or occasionally the “marginal rate of substitution in production”. It measures the reduction in one input per unit increase in the other input that is just sufficient to maintain a constant level of production. For example, the marginal rate of substitution of labour for capital gives the amount of capital that can be replaced by one unit of labour while keeping output unchanged.

To move from point A to point B in the diagram, the amount of capital is reduced from Ka to Kb while the amount of labour is increased only from La to Lb. To move from point C to point D, the amount of capital is reduced from Kc to Kd while the amount of labour is increased from Lc to Ld. The marginal rate of technical substitution of labour for capital is equivalent to the absolute slope of the isoquant at that point (change in capital divided by change in labour). It is equal to 0 where the isoquant becomes horizontal, and equal to infinity where it becomes vertical.

The opposite is true when going in the other direction (from D to C to B to A). In this case we are looking at the marginal rate of technical substitution capital for labour (which is the reciprocal of the marginal rate of technical substitution labour for capital).

It can also be shown that the marginal rate of substitution labour for capital, is equal to the marginal physical product of labour divided by the marginal physical product of capital.

In the unusual case of two inputs that are perfect substitutes for each other in production, the isoquant would be linear (linear in the sense of a function ). If, on the other hand, there is only one production process available, factor proportions would be fixed, and these zero-substitutability isoquants would be shown as horizontal or vertical lines.

Read more about this topic:  Production Theory

Famous quotes containing the words marginal, rate, technical and/or substitution:

    Most works of art are effectively treated as commodities and most artists, even when they justly claim quite other intentions, are effectively treated as a category of independent craftsmen or skilled workers producing a certain kind of marginal commodity.
    Raymond Williams (1921–1988)

    Writing a book I have found to be like building a house. A man forms a plan, and collects materials. He thinks he has enough to raise a large and stately edifice; but after he has arranged, compacted and polished, his work turns out to be a very small performance. The authour however like the builder, knows how much labour his work has cost him; and therefore estimates it at a higher rate than other people think it deserves,
    James Boswell (1740–1795)

    A technical objection is the first refuge of a scoundrel.
    Heywood Broun (1888–1939)

    To play is nothing but the imitative substitution of a pleasurable, superfluous and voluntary action for a serious, necessary, imperative and difficult one. At the cradle of play as well as of artistic activity there stood leisure, tedium entailed by increased spiritual mobility, a horror vacui, the need of letting forms no longer imprisoned move freely, of filling empty time with sequences of notes, empty space with sequences of form.
    Max J. Friedländer (1867–1958)