Why does the marginal rate of technical substitution : The marginal rate of technical substitution (MRTS) refers to the rate at which one input can be substituted for another while keeping the level of output constant.
It reflects the trade-off between inputs in the production process. When we move rightward and downward along a convex-shaped isoquant, the MRTS tends to decline.
Diminishing Marginal Rate of Technical Substitution:
As we move along a convex-shaped isoquant, we are changing the combination of inputs while maintaining the same level of output. Since the isoquant is convex, it indicates that inputs are not perfect substitutes; their marginal rate of substitution decreases as one input is substituted for another.
Here’s why the MRTS declines as we move rightward and downward along a convex-shaped isoquant:
- Increasing Marginal Product of Input: As we move rightward along the isoquant, we are increasing the quantity of one input while decreasing the quantity of another. This means that the increase in output resulting from an additional unit of the first input is greater than before.
- Decreasing Marginal Product of the Other Input: As we move downward along the isoquant, we are decreasing the quantity of another input while maintaining the same level of output. However, due to the convex shape of the isoquant, the marginal product of the second input tends to decrease. This means that the increase in output resulting from an additional unit of the second input is smaller than before.
- Trade-Off in Input Substitution: Since inputs are not perfect substitutes, as we continue to move along the isoquant, the increase in output from adding more of the first input begins to diminish, while the decrease in output from reducing the second input becomes less severe. This creates a trade-off between the two inputs.
- Decreasing MRTS: The MRTS is calculated as the ratio of the marginal product of the first input to the marginal product of the second input. As we move rightward and downward along a convex-shaped isoquant, the increasing marginal product of the first input and the decreasing marginal product of the second input contribute to a declining ratio, leading to a lower MRTS.
The convex shape of the isoquant indicates diminishing marginal rates of technical substitution. As we move rightward and downward along the isoquant, the MRTS declines due to the changing trade-off between inputs and the varying marginal product of each input.