Marginal rate of technical substitution financial definition of marginal rate of technical substitution
marginal rate of technical substitution
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marginal rate of technical substitution the ratio of the MARGINAL PHYSICAL PRODUCTS of two FACTOR INPUTS in the production process, that is, the amount by which it is possible to reduce factor input X and maintain output by substituting an extra unit of factor input Y. It is measured by the slope of the producer's ISOQUANT CURVE. In order to minimize his production costs, a producer must equate the ratio of the marginal physical products of the two factor inputs (shown by the isoquant curve) to the ratio of their factor prices (shown by the ISOCOST LINE). See ISOQUANT MAP.