Effect of changes in outlay on equilibrium position (expansion path):
An expansion path is locus of all equilibrium points when input prices
remain constant and expenditure on inputs increases. The producer
moves on higher and higher level of output in this type of changes. It is
the line that joins the equilibrium points of a producer over a period of
time. Thus it helps the producer make decision on the output
maximizing and cost minimizing input combination. Graphically,
In fig. initial equilibrium is at point E1. Given price of labour and capital,
when outlay increases, iso cost line shift upward in the form CD and EF.
Thus, he can reach higher output IQ2 and IQ3. Here OE is expansion
path line passes through the origin. Expansion path is a straight line
that passes through the origin in the case of linear homogenous
production function. In the case of non-homogenous production
function, it is not straight line (curve type).
Fixed coefficient type of production function (Leontief)
If fixed quantities of inputs are required to produce given level of
output, it is called fixed coefficient type of Production function. It
means inputs cannot be substituted for each other. Fixed proportion
production function can also be shown by iso quants. In this case the
two factors labour and capital must be used in fixed ratio, and then the
isoquant of such production function are right angled. Suppose in
production of commodity capital labour ratio must be used to produce
loo units of outputs is 2:3. In this case if two unit of capital 4 units of
labour are used then extra 1unt of labour would be wasted this will not
add to total output. If 200 units of output are required to be produced,
then given the capital-labour ratio 2:3 4 units of capital and 6units of
labour will have to be used. It can be shown from the following
diagram.
In fig. the slope of OR line represents the given capital labour ratio.
Along each isoquant marginal Product of factor is zero. Eg if we are at B
point on IQ2 then capital is constant at ok 1, use of more labour does
not make any addition to the total output i.e. marginal product of
labour is zero. Thus, in a fixed proportion Production function doubling
the quantities of capital and labour at a required ratio doubles the
output.
However in real life many fixed proportion productive process to
produce a commodity are available, then each Process involves a given
fixed factor ratio. It can be from the following figure.
In this fig. the four rays line OQ, OR, OS and OT shows four production
processes with different capital labour ratio. By Joining points QRST we
get kinked iso quants, which represent 200 of output. Every points
Kinked line (QRST) is not a feasible factor combination to produce 200
units of output. But the points QRST are feasible to produce 200 units
with different fixed capital-labour ratio and process.
CES Production function
CES Production function was propounded by two groups of Economists
independently. One group such as K. J. Arrow, H.B Chenery, B. S.
Minhas, R.M. Solow was - Propounded in 1961. Similarly another group
Murry Brown and J. S. Decaniwas propounded in 1963.
CES Production function is the generalization of Cobb-Dauglas
production function. According to this production function, the
elasticity of substitution is constant and not necessarily equal to unity.
The elasticity of substitution remains constant means when there is
change in relative price and input ratio, do not affect the elasticity. The
value of elasticity of substitution is determined by the underlying
technology. CES Production function can be expressed as,
Q = A [∂k-₰ + (1-∂) L-₰]-1/₰
Where, A = Efficiency Parameter. It is an indicator of the general state
of technology. Hence, the greater the value of A larger will be the
output. (A>O)
∂ = Distribution parameter. It measures the share of capital (o<∂ <1)
(capital intensity factor coefficient.) It shows relative contribution of
capital to the total output.
1-∂ = share of labour (labour intensity coefficient)
₰ = substitution parameter (₰>-1) this shows substitution possibility in
the production process. It is related to elasticity of substitution.
CES production function is linear homogenous and degree of
homogeneity is one.
Let two inputs K and L are changed in j times then,
Q = A [∂k-₰ + (1-∂) L-₰]-1/₰
= A [∂ (j k)-₰ + (1-∂) (j L)-₰] -1/₰
= A [∂ j-₰ k-₰ + (1-∂) j-₰ L-₰] -1/₰
= A [j-₰ {∂ k-₰ + (1-∂) L-₰}] -1/₰
= A j (-₰) (- 1/₰) [∂ k-₰ + (1-∂) L-₰] -1/₰
= j A [∂ k-₰ + (1-∂) L-₰] -1/₰
=jQ
Thus, CES production function shows constant returns to scale.
Homogenous and homothetic technologies
Homogenous production function implies that if all factors are
increased in a given proportion, output also increases in the same
proportion. Hence, it is the case of constant returns to scale. If there
are two factors L and K, then homogenous production function of first
degree can be expressed as:
Q = f (L, K)
By same proportion m, we observe the resulting new level of output Q *
Q * =f (m L, m K)
If m can be factored out, then new level of output can be expressed as
a function of m to any power r
Q* = mr f (L, K)
Or, Q*mr Q----- (1)
Where, m is any real number and r is constant. This production
function is homogenous function of rth. degree.
If r = 1, this implies C.R.S.
If r > 1, this implies I.R.S. and
If r< 1, this implies D.R.S. The expansion path of homogenous
production function of degree is always straight line passes through the
origin.
Thus, a homogenous production function is that if each of the input is
multiplied by m then m can be completely factored out of the function.
The power r of m is called the degree of homogeneity of the function
and it is the measure of returns to scale. If m cannot be factored out,
the production function is non homogenous.
Homothetic production function:
Homothetic functions are functions whose marginal rate of technical
substitution is homogenous of degree zero. The slope of iso quant
curve is drawn through the set of points in labour and capital space at
which the same quantity of output is produced for varying
combinations of inputs. In mathematic a homothetic function is simply
a monotonic (continuous increasing or continuous decreasing
production function) transformation of linear homogenous function.
The production z is said to be homothetic if z = H [f(x)] ----- (1) where
f(x) is linearly homogenous production function and H [f(x)] is
monotonic transformation of f(x). Thus it a monotonic transformation
of homogenous function E.g. E = f(x, y) = E(x)y
For linear homogenous production function Q = f(L, k), there is always
m Q = f(m L, m k). However when Q is monotonically transform and
made the homothetic production function Q*, then
Q* = H [f (L, k)]
m Q*≠ H [f(m L, m k)]
![Q* = H [f (L, k)]
m Q*≠ H [f(m L, m k)]](https://screenshots.scribd.com/Scribd/252_100_85/326/647730510/8.jpeg)
