Marginal rate of substitution

Marginal rate of substitution is a big phrase that basically means how willing you are to give up one thing to get more of another.

Imagine you have a plate of your favorite food, like pizza, and also a glass of your favorite drink, like lemonade. You like both the pizza and the lemonade, but you notice that you have more pizza than you need and not enough lemonade. You might decide to give up a piece of pizza to get some more lemonade. This is an example of the marginal rate of substitution.

The concept of the marginal rate of substitution is important because it helps us understand how people make choices. If you really love pizza and only sort of like lemonade, you might only be willing to give up a little bit of pizza to get more lemonade. But if you really love lemonade and are just okay with pizza, you might be willing to give up more pizza to get more lemonade.

In economics, we use the idea of the marginal rate of substitution to think about how people make choices when they have limited resources. For example, if you have a limited amount of money, you might have to decide whether to buy more pizza or more lemonade. The marginal rate of substitution helps you think about how much of one thing you are willing to give up to get more of the other, and how your choices might change if the prices of the pizza and the lemonade were different.

So, the marginal rate of substitution is really just a fancy way of talking about how people make choices and trade-offs when they have limited resources.