diminishing marginal rate of substitution the rate at which one good is substituted for another as they move along an indifference curve is referred to as the marginal rate of substitution. The convexity to the origin of an indifference curve
4.2.5 Diminishing marginal rate of substitution
Imagine a consumer possesses units of commodities X and Y. The consumer might now be willing to sacrifice units of Y to obtain additional units of X. The rate of exchange of X for Y will not, however, be constant and will depend upon the number of units of each good the consumer currently has. For example, if the consumer has a lot of Y and little X, the rate of exchange of X for Y will be relatively large. That is, a large amount of Y might be willingly sacrificed to obtain additional X. However, as Y becomes scarcer, and X more plentiful, the rate of exchange falls. Fewer Y would now be willingly sacrificed to obtain an extra unit of X.
This illustrates the principle of a diminishing marginal rate of substitution of one
shows a diminishing commodity for another. This would be consistent with our previous observation that
marginal rate of
substitution. That is,
additional units yield decreasing utility in that if X is scarce and Y plentiful, an extra unit
when moving down of X produces a relatively large amount of additional utility and the consumer should
the indifference curve, the consumer is only willing to sacrifice fewer and fewer units of one good to gain additional units of the other whilst maintaining the same level of satisfaction
willingly sacrifice a number of units of Y (where the utility of those units would be rela-
tively low) to gain an extra unit of X. The rate of exchange between the goods is such that the utility gained by consuming an extra unit of X is balanced by the utility lost in consuming less Y.