Constant elasticity of substitution

Constant elasticity of substitution (CES), in economics, is a property of some production functions and utility functions.

Specifically, it arises in a particular type of aggregator function which combines two or more types of consumption, or two or more types of productive inputs into an aggregate quantity. This aggregator function exhibits constant elasticity of substitution.

CES production function

The CES production function is a neoclassical production function that displays constant elasticity of substitution. In other words, the production technology has a constant percentage change in factor (e.g. labour and capital) proportions due to a percentage change in marginal rate of technical substitution. The two factor (capital, labor) CES production function introduced by Solow, and later made popular by Arrow, Chenery, Minhas, and Solow is:

where

= Quantity of output

= Factor productivity

= Share parameter

, = Quantities of primary production factors (Capital and Labor)