Page 57 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes numbers of oranges is increasing. As a result, the consumer will be ready to sacrifice less quantity of
oranges respectively in exchange of every additional unit of apple. In other words, MRS of apples for
oranges is decreasing causes of applicability of this law are same as that of law of diminishing marginal
utility it means (i) satisfaction of particular need (ii) goods are perfectly substituted and (iii) goods have
alternative uses. This law is not applicable in (i) Perfect Substitutes (ii) Perfect Complementary Goods.

4.7 Comparison of the Law of Diminishing Marginal Utility and the Law
of Diminishing Marginal Rate of Substitution

Law of diminishing marginal rate of substitution and law of diminishing marginal utility reflect an
important tendency of consumer’s behaviour. According to these laws, as the stock of goods increases at
consumer, the value of extra units decreases. So the law of diminishing marginal rate of substitution is
based on the law of diminishing marginal utility. But according to Hicks, law of diminishing marginal
rate of substitution explains this tendency of consumer behaviour with fewer assumptions than the law
of diminishing marginal utility. So this law is more realistic than the law of diminishing marginal utility
on account of the following reasons:
1. No need of measuring utility in Cardinal Numbers: Law of diminishing marginal utility is based
on the unrealistic assumption of cardinal measurement of utility whereas there is no need of measuring
utility of cardinal numbers in the laws of diminishing marginal utility of substitution. Therefore, this
law is more realistic.
2. Free from the Assumption of Independent Commodities: Law of diminishing marginal utility is based
on the unrealistic assumption that utility derived from a particular product depends on the available
quantity of product. For example, utility derived from tea will have no effect from utility derived from
related product coffee. There is no need of assumption of this concept of law of diminishing marginal
rate of substitution. This law takes into account the effects of relative products on each other’s utility.
3. Free from the Assumption of Constant Utility of Money: Law of Diminishing Marginal utility is
based on unrealistic assumption that marginal utility of money is constant. There is no need for this
assumption in Law of Diminishing Marginal Rate of Substitution.
But Koutsoyiannis believes that Marginal Rate of Substitution is placed is the concept of Marginal utility
as it can be proved that marginal rate of substitution is equal to the ratio of marginal utility of goods.

MU MU
MRS = X or MRS = Y
xy xy
MU MU
Y X
Self Assessment
Multiple choice questions:
4. Marginal rate of substitution determines the ............... of indifference curve.
(a) meaning (b) slope (c) satisfaction (d) aim
5. Constant Marginal Substitution means the slope is ...............
(a) unpredicted (b) constant (c) curve (d) straight
6. Diminishing marginal substitution means the indifference curve will be ...............
(a) convex (b) curve (c) constant (d) unpredicted
7. Marginal rate of substitution of perfect substitute goods is ...............
(a) not equal (b) curve (c) constant (d) equal

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