Page 81 - Azerbaijan State University of Economics

Yadulla H. Hasanli: The evaluation of mutual substitution elasticity of capital and labour
factors by application of CES function for economy of Azerbaijan

we will obtain the following quotation:

(B1.4)

The limit of substitution of factor K with factor L ( could be defined as follow:

(B1.5)

From combination of (B1.4) and (B1.5) we obtain the following:

(B1.6)

We can define the rate of substitution rate though the elasticity ratios as following:

(B1.7)

Although both Cobb-Douglas and CES functions are based on neo-classic

theory they are significant differences between them. Thus as we know the

substitution elasticity is a possibility of one factor to be replaced by other one. For

example, capital and labour force, in Cobb-Douglas function this substitution

elasticity is equal to one. In CES function this ratio can take any value. It is clear

that during the evaluation of parameters for Cobb-Douglas function it is

determined in advance that capital and labour has unit elasticity. If it is true than

the parameters identified for Cobb-Douglas function can be misleading. In order

to eliminate this shortage we should first of all evaluate the parameters of CES

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