Marginal rate of technical substitution

In economic theory, the Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( $-\Delta x_{2}$ ) when one extra unit of another input is used ( $\Delta x_{1}=1$ ), so that output remains constant ( $y={\bar {y}}$ ).

$MRTS(x_{1},x_{2})=-{\frac {\Delta x_{1}}{\Delta x_{2}}}={\frac {MP_{2}}{MP_{1}}}$

where $MP_{1}$ and $MP_{2}$ are the marginal products of input 1 and input 2, respectively, and $MRTS(x_{1},x_{2})$ is Marginal Rate of Technical Substitution of the input $x_{1}$ for $x_{2}$ .

Along an isoquant, the MRTS shows the rate at which one input (e.g. capital or labor) may be substituted for another, while maintaining the same level of output. The MRTS can also be seen as the slope of an isoquant at the point in question.

References

Mas-Colell, Andreu; Whinston, Michael; & Green, Jerry (1995). Microeconomic Theory. Oxford: Oxford University Press. ISBN 0-19-507340-1

References

See also