Cobb-Douglas Production Function

Definition: The Cobb-Douglas Production Function, given by Charles W. Cobb and Paul H.
Douglas is a linear homogeneous production function, which implies, that the factors of production
can be substituted for one another up to a certain extent only.
With the proportionate increase in the input factors, the output also increases in the same proportion.
Thus, there are constant returns to a scale. In Cobb-Douglas production function, only two input
factors, labor, and capital are taken into the consideration, and the elasticity of substitution is equal
to one. It is also assumed that, if any, of the inputs, is zero, the output is also zero.
Likewise, in the linear homogeneous production function, the expansion path generated by the cobb-
Douglas function is also a straight line passing through the origin. The CD function can be expressed
as follows:
Q = ALαKβ homogeneous, and there are constant returns
Where, Q = output to a scale. If the sum of these parameters is
A = positive constant less or more than one, then there is a
K = capital employed decreasing and increasing returns to a scale
L = Labor employed respectively.
α and β = positive fractions shows the where,
elasticity coefficients of outputs for inputs - Q is the quantity of products.
labor and capital, respectively. - L is the quantity of labor.
Β = 1-α - K is the quantity of capital.
This algebraic form of Cobb-Douglas - A is a positive constant.
function can be changed in a log linear form, - a and b are constants between 0 and 1.
with the help of regression analysis:  The returns to scale is measured
Log Q = log A + α log L + β log K by the sum of exponents of Cobb-
The homogeneity of the Cobb-Douglas Douglas production function i.e.,
production function can be checked by adding a+b
the values of α and β. If the sum of these If a + b = 1, returns to scale are constant.
parameters is equal to one, then it shows that If a + b > 1, returns to scale are increasing.
the production function is linearly If a + b < 1 , returns to scale are decreasing.
A. Marginal product of a factor is dependent upon its amount used in production.
Therefore, marginal product of labour depends on the amount of labour when no
change is made in capital input. In the same way, a marginal product of capital depends
upon the amount of capital which is used in production and diminishes as more capital
is used with a fixed quantity of labour.
 B. The exponents of labour and capital in Cobb-Douglas production function give a
measure of output elasticities of labour and capital respectively.
1. Cobb-Douglas production function can be extended by including more than two
factors. For example, agricultural production is not only dependent on labour and
capital used but also on the use of other inputs such as land, fertilizers, irrigation.
Including these inputs in the Cobb-Douglas function,
2. If the sums of exponents (a + b) in the two factors Cobb-Douglas production function
(Q =) is equal to one, then it would denote constant returns to scale.
3. The elasticity of sub-situation between labour and capital in Cobb-Douglas production
function is equal to unity. Because of this unit elasticity of substitution between two
factors in the production function.
Cobb-Douglas Production Function- Different Relationship between input and output
Linear Q=aLbKb
Q=aL Perfect Substitutes
Diminishing Returns Q=aL+bK
Q=aLb 0<b<1 Fixed Proportions
Cobb Douglas Q=min{aL,bK}
The Cobb-Douglas Production Function is a particular form of the Production Function.
It takes the following form:
Q(L,K) = A Lβ Kα The main characteristics of the Cobb-Douglas
 L:labor production function are:
 K:capital 1. The marginal product is positive and
 Q:output decreasing.
 A>0 2. Output elasticity is constant, equal to α for
 0<α<1 L or β for K.
 0<β<1 3. Return to scale are α+β

Properties of C-D Production Function: (iv) A and p are also elasticities of output with
respect to labour and capital respectively.
The C-D production function has the
following properties: (v) If one of the inputs is zero, output will also
be zero.
(i) There are constant returns to scale.
(vi) The expansion path generated by C-D
(ii) Elasticity of substitution is equal to one.
function is linear and it passes through the
origin.
(iii) A and p represent the labour and capital
shares of output respectively.
(vii) The marginal product of labour is equal to (vii) It becomes linear function in logarithm.
the increase in output when the labour input is
increased by one unit. (viii) It is more popular in empirical research.

(viii) The average product of labour is equal to
the ratio between output and labour input.
(ix) The ratio α /β measures factor intensity.
The higher this ratio, the more labour intensive
is the technique and the lower is this ratio and
the more capital intensive is the technique of
production.
Importance of C-D Production Function
The C-D production function possesses the
following merits:
(i) It suits to the nature of all industries.
(ii) It is convenient in international and inter-
industry comparisons.
Limitations of C-D Production Function
It has the following limitations:
(i) The function includes only two factors and
neglects other inputs.
(ii) The function assumes constant returns to
scale.
(iii) There is the problem of measurement of
capital which takes only the quantity of capital
available for production.
(iv) The function assumes perfect competition
in the factor market which is unrealistic.
(v) It does not fit to all industries.

(iii) It is the most commonly used function in (vi) It is based on the substitutability of factors
the field of econometrics. and neglects complementarity of factors.

(iv) It can be fitted to time series analysis and (vii) The parameters cannot give proper and
cross section analysis. correct economic implication.

(v) The function can be generalised in the case

of ‘n’ factors of production.

(vi) The unknown parameters a and p in the

function can be easily computed.