CONTSTANT ELASTICITY

SUBTITUTION
[CES]
FORMS OF PRODUCTION FUNCTION

 COBB DOUGLAS PRODUCTION FUNCTION

 CONSTANT ELASTICITY SUBSTITUTION

PRODUCTION FUNCTION
 VARIABLE ELASTICITY SUBSTITUTION
 LEONTIFF TYPE OF PRODUCTION
FUNCTION
 LINEAR TYPE OF PRODUCTION FUNCTION
CONSTANT ELASTICITY
SUBSTITUTION [CES]
Introduced by
Arrow, Chenery, Minhas, and Solow
In 1961
CES Production Function,

- is a linearly homogenous production

function with a constant elasticity of input
substitution, which takes on forms other
than unity.
CES expressed as
Q = A[aK-b + (1 - a)L-b]-1/b
 Q = A[aL-b + (1-a)K-b]-1/b

{A>0,0<a<1, & b >-1}

L= Labor K = Capital
A, a and b = parameters
Important property of CES

it is homogeneous of degree 1
Proved by
. Increasing both the input K and L,
. By a constant factor and
. By finding the final outcome
Suppose…………………..

K and L increased by constant factor m

……………………………
........................................................

Q’ = A[a(mK)-b+ (1-a)(mL)-1/b]-1/b
= A[m-b {aK-b +(1-a)L-b}]-1/b
= (m-b)-1/b . A[aK-b +(1-a)L–b]-1/b

(the term A[aK -b

+(1-a)L-b]-1/b = Q)
So Q’ = mQ
So CES production fn is homogenous
of degree 1
Advantages of CES production fn

A more general form of production fn

Can be used to analyse all types of
returns to scale
Removes many problems involved in
Cobb –Douglas Production fn
LIMITATIONS
 Claim of being a general form of production
function doesn’t stand empirical test
 Difficult to fit this fn to empirical data
 Difficult to generalise this fn to n-number of
factors
 Parameter b combines the effects of both K and
L when technological change occurs
homogenety parameter b is affected by both K
and L
Reference