| Sumario: | The concept of elasticity of substitution (ES) was originally introduced to represent a proportionate change in ratio of two factors corresponding to a proportionate change in their marginal rate of substitution or in their price ratio. The ACMS paper on CES production function [2] has revived interest in ES and led to an intensive work on production functions with focus on the ES. With it, some new definitions of ES have been suggested and those in turn have led to new production functions. The purpose of this note is to relate the various definitions to the general theory of factor demand and, using this as a basis, to examine the relationships between the various definitions. The various definitions differ in two major respects: (1) The variables which are held constant in the underlying economic experiment and (2) In the number of variables which are involved in the operation. The relationships between the various definitions can be examined within the familiar framework of micro theory. Some of the questions have been discussed more in terms of consumer theory whereas others have been stressed more in the theory of the firm. It is therefore desirable to state the analogy explicitly. The plan of the paper is as follows: The framework of the analysis is stated in Section 2. The results are utilized in Section 3 to generate various definitions of ES and to explore the relationships between them. Section 4 takes up the relations between the short run and the long run ES and Section 5 concludes the paper with some general remarks.
|
|---|