Marginal Rate of Technical Substitution: Guide for Australian Businesses 2025

The Marginal Rate of Technical Substitution (MRTS) might sound like economic jargon, but it’s a concept every savvy Australian business owner should understand. In 2025, as local firms face rising input costs, new technology incentives, and shifting labour markets, understanding how to substitute between capital and labour efficiently is more important than ever. Let’s break down what MRTS means, why it matters, and how it’s shaping production strategies across Australia right now.

Understanding MRTS: The Trade-Off Engine of Production

MRTS measures how much of one input (like labour) a business can replace with another input (like capital equipment), while keeping output unchanged. In practice, if a manufacturer wants to automate a production line, MRTS tells them how many workers can be replaced by investing in robotics, without affecting how many widgets roll off the line each day.

• Formula: MRTS = - (Change in Capital) / (Change in Labour), holding output constant.

• Interpretation: A high MRTS means you can easily substitute labour for capital (or vice versa) without much impact on production. A low MRTS means the two inputs aren’t easily swapped.

This trade-off is crucial for decision-making, especially in sectors facing wage growth or capital equipment grants.

Real-World Example: Australian Manufacturing and MRTS in 2025

Take the example of an Australian packaging company in 2025. With the federal government’s expanded instant asset write-off scheme (increased to $30,000 for eligible small businesses), many firms are weighing whether to invest in automated machinery or hire more staff. Suppose the company currently uses 10 workers and 5 machines to produce 1,000 boxes per day. If new automation means they can use 8 workers and 6 machines for the same output, their MRTS helps quantify the trade-off and cost-effectiveness of that shift.

• Labour Costs: Wage growth in 2025 (averaging 4.2% nationally) is pushing businesses to consider automation.

• Technology Incentives: Government grants and tax write-offs reduce the upfront cost of capital equipment.

• Environmental Policy: Some sectors are incentivised to invest in greener machinery, further altering the MRTS calculus.

In this context, MRTS isn’t just an academic metric—it’s a practical tool for evaluating whether to automate, outsource, or invest in staff training.

How MRTS Informs Strategic Decisions in 2025

Australian businesses are using MRTS to:

• Optimise Costs: Firms in logistics, retail, and food processing are using MRTS to find the cheapest mix of staff and technology, especially as minimum wage rises to $24.10 per hour.

• Respond to Policy Changes: With the 2025 National Skills Agreement rolling out funding for digital upskilling, some companies are retraining staff instead of replacing them—altering their MRTS over time.

• Plan for Uncertainty: Volatile energy prices and supply chain disruptions mean the optimal input mix can change rapidly. MRTS helps businesses stay flexible and competitive.

For example, a Melbourne-based logistics firm facing higher fuel costs may invest in electric delivery vehicles (capital) to reduce reliance on drivers (labour), especially with new state-level EV rebates in 2025. Here, their MRTS analysis incorporates both financial and environmental factors.

Key Takeaways: Why MRTS Matters for Your Business

• Actionable Insight: Understanding MRTS can help you make smarter decisions about hiring, automation, and technology investment.

• Policy Impact: Keep an eye on federal and state incentives—they’re changing the MRTS landscape in real time.

• Competitive Edge: Businesses that use MRTS to stay ahead of input cost trends are more resilient and profitable.

Whether you’re running a family-owned manufacturer or a fast-growing tech startup, mastering MRTS is a must for thriving in Australia’s dynamic 2025 economy.