Elasticity of substitution

Updated: Aug 20, 2021

The percentage change in the proportion in which two inputs are used, divided by the percentage change in the rate of technical subsitution. That is, as we move from point to point along an isoquant the rate of technical substitution bctween the inputs will change, as will the proportion in which inputs are used. The elasticity of substitution then measures the relationship between these changes as we move along an isoquant. The usefulness of the measure is that it summarizes the ease with which one input can be substituted for the other without changing output. A value of zero would indicate that there is no change in the proportion in which inputs must be used, i.e. they have to be used in fixed proportions and hence are not subsitutes. A value ofinfinity would indicate no change in the rate of substitution as factor proportions are varied, i.e. they are perfect substitutes.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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