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    Chap IV - Cobb Douglas PF

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    727822TPMB005 ARAVINTHAN.S
    The Cobb-Douglas production function relates output of a company to inputs using an equation where output (Y) equals a constant (A) multiplied by labor input (L) raised to the power of its output elasticity (α) and capital input (K) raised to the power of its output elasticity (β). It was developed by Cobb and Douglas to model the American manufacturing industry. The function exhibits constant, decreasing, or increasing returns to scale based on whether the sum of α and β is equal to, less than, or greater than 1, respectively. It is widely used due its simplicity but has limitations such as only including two inputs.

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    Chap IV - Cobb Douglas PF

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    727822TPMB005 ARAVINTHAN.S
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    The Cobb-Douglas production function relates output of a company to inputs using an equation where output (Y) equals a constant (A) multiplied by labor input (L) raised to the power of its output elasticity (α) and capital input (K) raised to the power of its output elasticity (β). It was developed by Cobb and Douglas to model the American manufacturing industry. The function exhibits constant, decreasing, or increasing returns to scale based on whether the sum of α and β is equal to, less than, or greater than 1, respectively. It is widely used due its simplicity but has limitations such as only including two inputs.

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    The Cobb-Douglas production function relates output of a company to inputs using an equation where output (Y) equals a constant (A) multiplied by labor input (L) raised to the power of its output elasticity (α) and capital input (K) raised to the power of its output elasticity (β). It was developed by Cobb and Douglas to model the American manufacturing industry. The function exhibits constant, decreasing, or increasing returns to scale based on whether the sum of α and β is equal to, less than, or greater than 1, respectively. It is widely used due its simplicity but has limitations such as only including two inputs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    23 views8 pages

    Chap IV - Cobb Douglas PF

    Uploaded by

    727822TPMB005 ARAVINTHAN.S
    The Cobb-Douglas production function relates output of a company to inputs using an equation where output (Y) equals a constant (A) multiplied by labor input (L) raised to the power of its output elasticity (α) and capital input (K) raised to the power of its output elasticity (β). It was developed by Cobb and Douglas to model the American manufacturing industry. The function exhibits constant, decreasing, or increasing returns to scale based on whether the sum of α and β is equal to, less than, or greater than 1, respectively. It is widely used due its simplicity but has limitations such as only including two inputs.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 8

    The Cobb-Douglas Production

    Function

    Chapter IV
    • The simplest and the most widely used production
    function in Economics is the Cobb-Douglas production
    function.
    • The reasons for its popularity are, it possesses some
    interesting properties and its computational ease in the
    empirical estimation.
    • C.W Cobb and P.H. Douglas (1928) used this function
    for estimating the relationship between inputs and
    outputs in the American manufacturing industry
    during 1899 to 1922.
    Cobb- Douglas production function
    • The Cobb- Douglas production function represents the
    relationship of an output to inputs as follows
    Y = A Lα Kβ,
    Where:
    • Y = total production (the monetary value of all goods produced in
    a year)
    • L = labor input
    • K = capital input
    • A, α and β are the output elasticity's of labor and capital,
    respectively. These values are constants determined by available
    technology.
    Cobb- Douglas production function
    Further, if: α + β = 1
    • The production function has “constant returns to scale”. That is, if L
    and K are each increased by 20%,
    Y increases by 20%.
    If: α + β < 1
    • The production function has “decreasing returns to scale”. That is if
    L and K are each increase by 20%, Y increases by 10% only.
    If: α + β > 1
    • The production function has “Increasing returns to scale”. That is if L
    and K are each increase by 20%, Y increases by 40% .
    Criticism of Cobb-Douglas Production Function

    • It includes only two factor inputs-capital and labour


    • Labour input may be measured in number or man hours.
    But it is difficult to measure capital input due to its
    depreciation over a period of time.
    • It assumes constant returns to scale which may not be
    always possible
    • This function assumes that there is perfect competition in
    the market.
    Managerial Uses of Production Function

    • Least-Cost Combination
    • In a dynamic set-up, the prices of inputs are often
    changing.
    • As a result, the feasible combinations of inputs will have
    to be worked out regularly in order to ensure the least-cost
    combination.
    • This is possible by substituting high const inputs by
    relatively cheaper inputs so that the cost of production
    might be reduced considerably.
    Managerial Uses of Production Function

    • Decision-Making
    • Production function is a useful managerial tool to arrive at a
    decision regarding the employment of a variable input factor
    in the production process.
    • So long as the marginal revenue productivity of a variable
    factor exceeds its price, it may be worthwhile to employ it.
    • Moreover it is also useful in the long run. If returns to
    scale are increasing, it will be worthwhile to increase
    production; the opposite is the case if there are diminishing
    returns to scale.

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