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Definition of CES Production Function


Definition: CES stands for constant elasticity of substitution. This is a function describing production, usually at a macroeconomic level, with two inputs which are usually capital and labor. As defined by Arrow, Chenery, Minhas, and Solow, 1961 (p. 230), it is written this way:

V = (beta*K-rho + alpha*L-rho) -(1-rho) where V = value-added, (though y for output is more common),
K is a measure of capital input,
L is a measure of labor input,
and the Greek letters are constants. Normally alpha > 0 and beta > 0 and rho > -1. For more details see the source article.

In this function the elasticity of substitution between capital and labor is constant for any value of K and L. It is (1+rho)-1.(Econterms)

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Books on The CES Production Function:

  • Sargent, Thomas J. 1979. Macroeconomic Theory. New York: Academic Press.
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