Saturday, September 1, 2018

Economics applied everywhere.....

MARGINAL RATE OF SUBSTITUTION


It is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. A measure of number of units of Y that must be given up per unit of X added so as to maintain a constant level of utility.

EXAMPLE :

I had two variety of chocolate dairy milk silk and dairy milk fruit and nut. But when i have both the variety i will like to have more of dairy milk silk and let go dairy milk fruit and nut but will maintain same level of utility. In the beginning it has marginal rate of substitution and later on it becomes diminishing marginal rate of substitution.

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