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In economics, a production function represents the relationship between the output and

the combination of factors, or inputs, used to obtain it.

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.

There can be other inputs, K and L are just examples.

The Cobb-Douglas production function is a particular form of the production function. It is
widely used because it has many attractive characteristics, as we will see below.

The basic form of the Cobb-Douglas production function is as follows:

Q(L,K) = A Lβ Kα

Where:
- Q is the quantity of products.
- L is the quantity of labor.
- K is the quantity of capital.
- A is a positive constant.
- β and α 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

In the case of the Cobb-Douglas production function:

∂Q/∂L = Aβ L(β-1) Kα

We can see that if L or K increases, the total output will increase, that is, the marginal
product is positive.

As we can see in the following plots, the marginal product is decreasing.
Output Elasticity
Output elasticity is the porcentual change in output in respond to a change in levels of
either labor or capital.

(∂Q/Q) / (∂L/L) = (∂Q/∂L) / (Q/L)

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:

(∂Q/Q) / (∂L/L) = (∂Q/∂L) / (Q/L)

= [ Aβ L(β-1) Kα ] / [ A Lβ Kα / L ]

= [ Aβ L(β-1) Kα ] / [ A L(β-1) Kα ]

Output elasticity with respect to labor is constant and equal to β. If β is 0.2 and labor
increases in 10%, output will increase 2%.

α and β 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)β (cK)α

= A cβ Lβ cα Lα

= cβ cα A Lβ Kα

= c(β+α) Y

As we can see, if all inputs change by a factor of c, output increases by c(β+α).

Then:
If β+α=1 , the production function has constant returns to scale.

If β+α > 1 , the production function has increasing returns to scale.

If β+α < 1 , the production function has decreasing returns to scale.

Abstract
The Cobb-Douglas production function has:
- Positive decreasing marginal product.
- Constant output elasticity, equal to β and α for L and K.
- Constant returns to scale equal to β+α.