Marginal Rate of Technical Substitution

The marginal rate of technical substitution (MRTS) is one for the firms. MRTS is a firm asking, “If I decrease x-input in my factory, how much of y-input do I need to keep productivity the same as before the change?” The marginal rate of technical substitution helps firms figure out how to tradeoff between capital and labor, though it could be other inputs, too.

Basically, the marginal rate of technical substitution is the firm version of the plain ol’ marginal rate of substitution, which is the consumer version (think: indifference curves).

MRTS will likely be popping up more and more in economics as programmers and engineers build robots to do things, replacing one human-job at a time. Why would a firm have a sometimes-late, sometimes-sick, sometimes-tired, sometimes-incompetent human do something when it could have a never-late, never-sick, never-tired (well, okay, it will need some maintenance eventually) and only-as-incompetent-as-the-engineers-who-built-it robot to do the job instead?