Capital-labor substitution and economic efficiency¶
Arrow, K. J., Chenery, Minhas, & Solow, R. M. (1961). Capital-labor substitution and economic efficiency. Review of Economics and Statistics, 43(3), 225-250.
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Primes¶
- Substitutability
- The tradeoff is not fixed; designers choose where on the spectrum to operate based on requirements—a tradeoff Arrow, Chenery, Minhas, and Solow (1961) made quantitative through the elasticity of substitution parameter, which formally measures how readily one input can replace another along a production frontier as relative prices change.
This sourceIntroduces the constant elasticity of substitution (CES) production function; formalizes the flexibility-optimality tradeoff through a single parameter quantifying the ease with which one input can be substituted for another along an isoquant.
- The tradeoff is not fixed; designers choose where on the spectrum to operate based on requirements—a tradeoff Arrow, Chenery, Minhas, and Solow (1961) made quantitative through the elasticity of substitution parameter, which formally measures how readily one input can replace another along a production frontier as relative prices change.
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