About Lesson
Constant rate of substitution:
- It means that unit change in one product is throughout accompanied by the same unit opposite change in other product.
- Gram and wheat, for example, substitute for land at constant rate.
Increasing rate of substitution:
- Each unit increase in the level of one product is accompanied by larger and larger decrease in the level of the other product.
- For example, wheat and gram will substitute at an increasing rate for capital and labor.
Decreasing rate of substitution:
- A unit increase in the level of one product in this case is accompanied by lesser-by-lesser decrease in the level of the product.
- Dairy and crops within a limited range may substitute at decreasing rate.
Summary of Basic enterprise relationship
|
Marginal rate of substitution |
Enterprise relationship |
|
Δy2/Δy1>0 |
Complementary |
|
Δy2/Δy1<0 |
Competitive |
|
Δy2/Δy1=0 |
Supplementary |
