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Lecture 8 Notes Substitutability of Factors K K/L1 K/L2

The document discusses different types of substitutability between capital (K) and labor (L) as factors of production. It describes Leontief technology which assumes fixed proportions between inputs. It also describes Cobb-Douglas and CES production functions which allow for varying degrees of imperfect substitutability between K and L from constant to increasing or decreasing returns to scale. Isoquants are introduced as curves that show the minimum combinations of inputs needed to produce a given level of output.

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23 views2 pages

Lecture 8 Notes Substitutability of Factors K K/L1 K/L2

The document discusses different types of substitutability between capital (K) and labor (L) as factors of production. It describes Leontief technology which assumes fixed proportions between inputs. It also describes Cobb-Douglas and CES production functions which allow for varying degrees of imperfect substitutability between K and L from constant to increasing or decreasing returns to scale. Isoquants are introduced as curves that show the minimum combinations of inputs needed to produce a given level of output.

Uploaded by

120219a
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LECTURE 8 NOTES

SUBSTITUTABILITY OF FACTORS
K

K/L1
K/L2

K/L1X = MORE CAPITAL

INTENSIVE
K/L3X = MORE LABOUR
INTENSIVE
K/L3

X= F(L,K) = MIN (K,L)


X depends on the minimum

amount of
X

K and L the organisation has


L

SUBSTITUABILITY

FIXED PROPORTIONS LEONTIEF TECHNOLOGY


K/L
2X
X
X

PERFECT SUBSTITABILITY
X = f(L, K) = aK +bL

2X

IMPERFECT SUBSTITUTABILITY E.G. COBB


DOUGLAS PRODUCTION FUNCTION
X= aK(^b)L(^c)
b+c > 1 INCREASING RETURNS TO SCALE
X1

b+c = 1 CONSTATNT RETURNS TO SCALE


b+c < 1 DECREASING RETURNS TO SCALE
(DISECONOMIES)

ISOQUANT
-

SHOWS THE MINIMUM DIFFERENT


QUANTITIES OF INPUTS REQUIRED TO
PRODUCE A GIVEN LEVEL OF PRODUCTION

I2
I

MRS = dK/dL
As you go down the isoquant MRS gets less
Elasticity of substitution = d(K/L)/(K/L)
d(MRSL,K)/(MRSL,K)
MRTS = dK/-dL
Output doesnt change if a firm moves from 1 point on iso curve to
another, but MP and TS does

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