The Marginal Rate of Technical Substitution between two factors (inputs) is the rate at which one factor can be substituted for another at the margin without there being any alternation in the quantity of output produced. Thus, the marginal rate of technical substitution of labour (L) for capital (K) MRTSLK is defined as the amount of K which can be replaced by a unit of L without causing a change in the quantum of output produced. In simple words MRTS LK is the amount of K which can be given up for a unit of L without causing a change in output.
Each combination of labour (L) and capital (K), gives the same amount of output. But as we move from combination A to B, we give up % units of capital for 1 additional unit of labour and maintain the output at the same level. Thus, marginal rate of technical substitution MRTSLK is 5 units of capital for 1 unit of labour.
Marginal Rate of Technical Substitution
|Factor Combination||Labour (L)||Capital (K)||MRTSLK|
Now, when we move from B to C, the amount of capital given up for an additional unit of labour is lower at 4. This rate is further lower at successive combinations D and E. thus, as we add more and more labour, the amount of capital being given up or subtituted by each additional unit of labour become lower and. This is called diminishing marginal rate of technical substitution.SUBMIT ASSIGNMENT NOW!