Significance

The willingness to substitute one good for another is important because consumers have budget constraints; that is, they have finite resources to purchase the goods they want.

Theories/Speculation

The economic theory of consumer choice depends not only on a person's resources, but also his tastes and preferences regarding different goods. These factors help determine the marginal rate of substitution.

Function

Economists often visually graph consumer preferences with indifference curves, which illustrate the bundles of consumer goods that provide a person equal satisfaction. The slope at any point on an indifference curve represents the marginal rate of substitution.

Considerations

The rate at which a person is willing to trade one good for another depends in part on the quantity of goods already consumed. For example, a person's willingness to exchange hamburgers for sodas depends in part on whether the person is hungry or thirsty, based on the amount of each good he or she has.

Effects

According to the marginal rate of substitution, consumers are more likely to trade goods of which they have an abundance and less willing to trade away those of which they have few.

Source:

"Principles of Economics (3rd edition)," N. Gregory Mankiw; 2003

More Information:

Investopedia: Marginal Rate of Substitution