Q=f(L,K)
Where:
- Q is the quantity of products
- L the quantity of labor applied to the production of Q, for example, hours of labor in a
month.
- K the hours of capital applied to the production of Q, for example, hours a machine has
been working for the production of Q.
Q(L,K) = A L K
Where:
- Q is the quantity of products.
- L is the quantity of labor.
- K is the quantity of capital.
- A is a positive constant.
- and are constants between 0 and 1.
Graphically:
Marginal Product
Marginal product is the change in total production, when there is an infinitesimal change
in the inputs. Marginal product is the first derivative of the production function with respect
to an input.
Q/L
Q/L = A L(-1) K
We can see that if L or K increases, the total output will increase, that is, the marginal
product is positive.
If output elasticity is greater than 1, the production function is elastic and vice versa. In the
case of the Cobb-Douglas production function, output elasticity can be measured quite easily:
= [ A L(-1) K ] / [ A L K / L ]
= [ A L(-1) K ] / [ A L(-1) K ]
Output elasticity with respect to labor is constant and equal to . If is 0.2 and labor
increases in 10%, output will increase 2%.
and are output elasticities of capital and labor, and are constant.
Returns to scale
Returns to scale measure how much additional output will be obtained when all factors
change proportionally. If the output increases more than proportionally, we say we have
increasing returns to scale. If the output increases less than proportionally, we say we have
decreasing returns to scale.
In the case of the Cobb-Douglas production function, to check how much will output increase
when all factors increase proportionally, we multiply all inputs by a constant factor c. Y
represents the new output level.
Y = A (cL) (cK)
= A c L c L
= c c A L K
= c(+) Y
Then:
If +=1 , the production function has constant returns to scale.
Abstract
The Cobb-Douglas production function has:
- Positive decreasing marginal product.
- Constant output elasticity, equal to and for L and K.
- Constant returns to scale equal to +.