CHAPTER I -- Section 6

In this section Hicks takes the first step forward in his effort to build a theory of consumer's demand from concepts not implying a quantitative measure of utility.  He begins with the concept of marginal utility.  He notes that if we fix the quantities of two commodities, then the slope of the indifference curve at that point is equal to the ratio of the marginal utilities of those goods, and the ratio is "independent of the arbitrariness in question."  He calls this quantity the marginal rate of substitution of X for Y, and defines it as "the quantity of Y that would just compensate the consumer for the loss of a marginal unit of X." For given market prices, an individual in equilibrium will have his marginal rate of substitution between any two goods be equal to the ratio of their prices.  If this were not the case, he could gain by reducing his consumption of one of the goods and spending the savings on the other good.  The condition for equilibrium on the market will therefore be written in terms of marginal rates of substitution rather than marginal utilities.  Hicks ends this section by noting that we can say that a commodity's price equals the marginal rate of substitution of that commodity for money.