What Is Marginal Rate of Technical ♐Substitution (MRTS)?

The marginal rate of technical substit🤪ution (MRTS) is the rate at which production inputs, tyဣpically labor and capital, can be substituted while maintaining the same level of output.

The MRTS reflects the give-and-take between factors that allow a firm to maintain a level of productivity. MRTS differs from the marginal rate of substitution (MRS) in that MRTS is focused on producer 澳洲幸运5开奖号码历史查询:equilibrium and MRS is focused on consumer equilibrium.

Formula for the MRTS

 $\begin{aligned} &\text{MRTS(\textit{L}, \textit{K})} = - \frac{ \Delta K }{ \Delta L } = \frac{ \text {MP}_L }{ \text {MP}_K } \\ &\textbf{where:} \\ &K = \text{Capital} \\ &L = \text{Labor} \\ &\text{MP} = \text{Marginal products of each input} \\ &\frac{ \Delta K }{ \Delta L } = \text{Amount of capital that can be reduced}\\ &\text{when labor is increased (typically by one unit)} \\ \end{aligned}$​MRTS(L, K)=−ΔLΔK​=MPK​MPL​​where:K=CapitalL=LaborMP=Marginal products of each 🃏inputΔLΔK​=Amount of capital that can be red🐻ucedwhen labor is increased (typically by one&💖nbsp;unit)​

How to Calculate MRTS

An isoquant is a graph showing combinations of capital and labor that will yield the same output. The slope of the isoquant indicates the MRTS or at any point aꦗlong the isoquant how much capital would be required to replace a unit of labor at that production point.

For example, in 澳洲幸运5开奖号码历史查询:the graph of an isoquant where capital (represented with K on its Y-axis and l🐷abor (represented with L) on its X-axis, the slope of the isoquant, or the MRTS at any one point, is calculated as dL/dK.

What Does the MRTS Tell You?

The slope of the isoquant, or the MRTS, on the graph, shows the rate at which a given input, either labor or capital, can be substituted for the other while keeping the same output level. The MRTS is represented by the absolute value of an isoquant's slope at a chosen point.

A decline in MRTS along an isoquant for producing the same level of output is called the diminishing marginal rate of 澳洲幸运5开奖号码历史查询:substitution. The figure below shows that when a firm moves down from point (a) to point (b) an♚d uses one additional unit of labor, the firm can give up 4 units of capital (K) and yet remain on the same isoquant at point (b). So the MRTS is 4. If the firm hires another unit of labor and moves from point (b) to (c), the firm can reduce its use of capital (K) by 3 units but remains on the same isoquant, and the MRTS is 3.

The Bottom Line

The marginal rate of technical substitution (MRTS) is the rate at which production inputs can substituted for one another while maintaining productivity. Typically, labor and capiౠtal are the inputs. MRTS can be represented by a curve graph, or an isoquant, which represents the various combinations of inputs that would produce the same amount of output.𒀰