Explain the concept of marginal rate of substitution with the help of a numerical example. Also explain its behaviour along an indifference curve.

Marginal rate of substitution represents the rate at which consumers want to substitute a commodity for another commodity.

Marginal Rate of Substitution =

The optimum bundle of consumers is located at that point where the budget line tends to be tangent to indifference curve. With the budget line being tangent to indifference curve at a certain point, the absolute value of budget line as well as the slope of indifference curve gets equal at that point. This, thus, indicates that the marginal rate of substitution is equivalent to price ratio. The slope of budget line represents that rate at which consumers are capable of substituting a good for another in the market. At the optimum, two rates should be equal. Thus, at a point where marginal rate of substitution is higher, the price ratio is incapable of being optimum which is the same case even when the marginal rate of substitution is lesser.

For example, let the goods consumed by a certain individual be X and Y. Supposedly, the following combinations relating to these goods possess the same utility level for him/her:

Thus, this consumer wants to sacrifice 4Y to get second unit of X. For the third unit of X, he/she seems to be willing to sacrifice less due to reduction of marginal utility of X as more of X is consumed by him/her.