Production function/Tutorials: Difference between revisions
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It can be shown that, in a perfectly competitive economy, α is labour's share of the value of output, and β is capital's share. | It can be shown that, in a perfectly competitive economy, α is labour's share of the value of output, and β is capital's share. | ||
<ref>[http://www.econlib.org/Library/NPDBooks/Thirlby/bcthLS2.html#Robbins,%20Remarks%20on%20certain%20aspects Lionel Robbins: "Remarks Upon Certain Aspects of The Theory of Costs", ''Economic Journal'' March 1934.]</ref> | |||
<ref>Jacob Viner: "Cost Curves and Supply Curves", in ''Readings In Price Theory'', edited by G. J. Stigler and K. E. Boulding. Irwin, 1952.</ref> | |||
Revision as of 06:30, 3 September 2008
The Cobb-Douglas production function
The Cobb-Douglas function has the form:
- Y = A. Lα . Cβ,
where
- Y = output, C = capital input, L = labour input,
- and A, α and β are constants determined by the technology employed.
If α = β = 1, the function represents constant returns to scale,
If α + β < 1, it represents diminishing returns to scale, and,
If α + β > 1, it represents increasing returns to scale.
It can be shown that, in a perfectly competitive economy, α is labour's share of the value of output, and β is capital's share.
- ↑ Lionel Robbins: "Remarks Upon Certain Aspects of The Theory of Costs", Economic Journal March 1934.
- ↑ Jacob Viner: "Cost Curves and Supply Curves", in Readings In Price Theory, edited by G. J. Stigler and K. E. Boulding. Irwin, 1952.