Page 82 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.70, # 1, 2013, pp. 77-96

function and calculate the substitution elasticity of the factors. If it is equal to one

than the function is equal to the Cobb-Douglas production function.

We would like to note that -substitution elasticity in function

is identified as shown in box 2.

Box 2: Substitution elasticity

The possibility for substitution of the factors with each other shows various

combination of production factors in case when the production function is able to

maintain the constant production level. For example, substitution of local change

between capital and labour factors in cases when all other conditions are equal,

several points in special area could be the elasticity factor between capital and

labour. The substitution elasticity between capital and labour could be defined as

follow:

ln d (K/L)
   (B2.1)
KL
ln d (M Y K )/MY L )

F  dK  F  dL  0
K   L

If we write it in more extend form, it looks like

Here, and show the limit of substitution of the production (GDP) for

capital and labour respectively.

81