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====== Cobb-Douglas Production Function ====== | ====== Cobb-Douglas Production Function ====== | ||
- | + | The Cobb-Douglas Production Function is a particular form of the [[:en:production-function|]]. | |
- | The Cobb-Douglas Production Function is a particular form of the [[Production Function]]. | + | |
It takes the following form: | It takes the following form: | ||
- | Q(L,K) = A L<sup>β</sup>K<sup>α</sup> | + | Q(L,K) = A L<sup>β</sup> K<sup>α</sup> |
- | * L:labor | + | * L:labor |
* K:capital | * K:capital | ||
* Q:output | * Q:output | ||
Line 15: | Line 14: | ||
* 0<β<1 | * 0<β<1 | ||
- | The main characteristics of the Cobb-Douglas production function are: | + | ======= Properties of Cobb Douglas Production Function ======== |
- | - The [[marginal product]] is positive and decreasing. | + | - The [[:en:marginal-product|marginal product]] is positive and decreasing. |
- | - [[Output elasticity]] is constant, equal to α for L or β for K. | + | - [[:en:cobb-douglas-output-elasticity|Output elasticity]] is constant, equal to α for L or β for K. |
- | - [[Return to scale]] are constant and equal to α+β | + | - [[:en:return-to-scale|Return to scale]] are α+β |
Plot of a Cobb-Douglas production function: | Plot of a Cobb-Douglas production function: | ||
- | {{:en:cobb-douglas-ew.jpg?nolink|}} | + | {{:en:cobb-douglas-ew.jpg?nolink&|cobb-douglas-ew.jpg}}{{ :en:cobb-douglas-1.svg.png?nolink&}} |
- | ===== The [[marginal product]] is positive and decreasing ===== | + | ===== The marginal product is positive and decreasing ===== |
This behavior is usually seen in a lot of real world examples. To find the marginal product of a production factor, we derivate the total output with respect that factor. For example, to find the marginal product of capital: | This behavior is usually seen in a lot of real world examples. To find the marginal product of a production factor, we derivate the total output with respect that factor. For example, to find the marginal product of capital: | ||
- | ∂Q / ∂K = | + | ∂Q / ∂K = |
- | = α * (A L<sup>β</sup>) K<sup>(α-1)</sup> | + | = α * (A L<sup>β</sup> ) K<sup>(α-1)</sup> |
- | Given that α is positive and lower than 1, the marginal product is positive and decreasing. | + | Given that α is positive and lower than 1, the marginal product is positive and decreasing. |
Graphically: | Graphically: | ||
- | {{:es:cobb-douglas-marginal.png?nolink|}} | + | {{:es:cobb-douglas-marginal.png?nolink&}} |
+ | |||
+ | ===== Output elasticity is constant ===== | ||
+ | |||
+ | Output elasticity is defined as the percent change in output, when there is a percent change in one production factor. | ||
+ | |||
+ | In the case of the Cobb-Douglas production function, output elasticity is constant. Output elasticity of labor is β and output elasticity of capital is α. | ||
+ | |||
+ | ==== Proof ==== | ||
+ | |||
+ | By definition, output elasticity is: | ||
+ | |||
+ | (∂Q/Q) / (∂L/L) = | ||
+ | |||
+ | = (∂Q/∂L) / (Q/L) That is the marginal product of labor divided the medium product of labor. | ||
+ | |||
+ | = [ Aβ L<sup>β-1</sup> ) K<sup>α</sup> ] / [ A L<sup>β</sup> K<sup>α</sup> / L ] | ||
+ | |||
+ | Given that 1/L is L<sup>-1</sup> , AL<sup>β</sup> K<sup>α</sup> /L is AL<sup>β-1</sup> K<sup>α</sup> . It follows that output elasticity is: | ||
+ | |||
+ | = AβL<sup>β-1</sup> K<sup>α</sup> / AL<sup>β-1</sup> K<sup>α</sup> | ||
+ | |||
+ | The only difference between the numerator and the denominator is β; then: | ||
+ | |||
+ | Output elasticity = AβL<sup>β-1</sup> K<sup>α</sup> / AL<sup>β-1</sup> K<sup>α</sup> = β | ||
+ | |||
+ | ===== Return to scale are α+β ===== | ||
+ | |||
+ | Returns to scale measure the proportional change in output, given a proportional change in the quantity of every factor of production. | ||
+ | |||
+ | ==== Proof ==== | ||
+ | |||
+ | If we increase every factor in a given constant c, the new output level will be: | ||
+ | |||
+ | Q<sup>'</sup> = A(cL)<sup>β</sup> (cK)<sup>α</sup> | ||
+ | |||
+ | = Ac<sup>β</sup> L<sup>β</sup> c<sup>α</sup> K<sup>α</sup> | ||
+ | |||
+ | = c<sup>β</sup> c<sup>α</sup> AL<sup>β</sup> K<sup>α</sup> | ||
+ | |||
+ | = c<sup>β+α</sup> Q | ||
+ | |||
+ | This means that if we increase every production factor by c, the output level will increase in c<sup>β+α</sup> . | ||
+ | |||
+ | If β+α = 1, the output will increase in c. In this case, the Cobb-Douglas production function has constant return to scale. | ||
+ | |||
+ | If β+α < 1, the proportional increase in output will be lower than the proportional increase in production factors. In this case, the Cobb-Douglas production function has decreasing returns to scale. | ||
+ | |||
+ | If β+α > 1, the proportional increase in output will be higher than the proportional increase in production factors. In this case, the production function has increasing returns to scale. | ||
+ | |||
+ | [[:en:cobb-douglas-output-elasticity|]] | ||