MANAGERIAL ECONOMCS PROJECT

TOPIC – APPLICATIONS COBB DOUGLS PRODUCTION

FUNCTION IN INDIAN ECONOMY
SUBMITED BY:
ADITI AGRAWAL(06)
AYUSHI JALAN(11)
ASTHA VERMA(56)
RIYA GUPTA(07)
PULKIT SACHDEVA()
SHASHANK KUMAR(24)
PRODUCTION FUNCTION
The functional relationship between physical inputs (or factors of production) and output is
called production function. It assumed inputs as the explanatory or independent variable and
output as the dependent variable. Mathematically, we may write this as follows:
Q = f (L,K)
Here, ‘Q’ represents the output, whereas ‘L’ and ‘K’ are the inputs, representing labour and
capital (such as machinery) respectively. Note that there may be many other factors as well but
we have assumed two-factor inputs here.
The production function is differently defined in the short run and in the long run. The
distinction is based on the nature of factor inputs.

COBB DOUGLAS PRODUCTION FUNCTION

In economics, a production function represents the relationship between the output and the
combination of factors, or inputs, used to obtain it. The Cobb-Douglas production function is a
particular form of the production function. The basic form of the Cobb-Douglas production
function is:
Q(L,K) = A L^aK^b
where,
- Q is the quantity of products.
- L is the quantity of labor.
- K is the quantity of capital.
- A is a positive constant.
- a and b are constants between 0 and 1.
The returns to scale is measured by the sum of exponents of Cobb-Douglas production function
i.e., a + b
If a + b = 1, returns to scale are constant.
If a + b > 1, returns to scale are increasing.
If a + b < 1 , returns to scale are decreasing.
Marginal product of a factor
is dependent upon its amount used in production. Therefore, marginal product of labour depends
on the amount of labour when no change is made in capital input. In the same way, a marginal
product of capital depends upon the amount of capital which is used in production and
diminishes as more capital is used with a fixed quantity of labour.
The exponents of labour and capital in Cobb-Douglas production function give a measure of
output elasticities of labour and capital respectively.
Cobb-Douglas production function can be extended by including more than two factors. For
example, agricultural production is not only dependent on labour and capital used but also on the
use of other inputs such as land, fertilizers, irrigation. Including these inputs in the Cobb-
Douglas function,
If the sums of exponents (a + b) in the two factors Cobb-Douglas production function
(Q =) is equal to one, then it would denote constant returns to scale.
The elasticity of sub-situation between labour and capital in Cobb-Douglas production function
is equal to unity. Because of this unit elasticity of substitution between two factors in the
production function.
Charles W. Cobb and Paul H. Douglas studied the relationship of inputs and outputs and formed
an empirical production function, popularly known as Cobb-Douglas production function.
Originally, C-D production function applied not to the production process of an individual firm
but to the whole of the manufacturing production.
The Cobb-Douglas production function is expressed by
Q = ALαKβ

Where Q is output and L and A’ are inputs of labour and capital respectively. A, α and β are
positive parameters where α > 0, β > 0. The equation tells that output depends directly on L and
K and that part of output which cannot be explained by L and К is explained by A which is the
‘residual’, often called technical change.
The marginal products of labour and capital are the functions of the parameters A, α and β and
the ratios of labour and capital inputs. That is,
MPL =∂Q/∂L = αAL α-1K β
MPK = ∂Q/∂K = βAL αK β-1

In other words, this function characterizes the returns to scale thus:

α + β >1: Increasing returns to scale
α + β =1: Constant returns to scale
α +β <1: Decreasing returns to scale.
Although the С-D production function is a multiplicative type and is non-linear in its general
form, it can be transferred into linear function by taking it in its logarithmic form. That is why,
this function is also known as log linear function, which is
Log Q = log A + a log L + p log K
It is easier to compute С-D function when expressed in log linear form.

HISTORY
Paul Douglas explained that his first formulation of the Cobb–Douglas production function was
developed in 1927; when seeking a functional form to relate estimates he had calculated for
workers and capital, he spoke with mathematician and colleague Charles Cobb, who suggested a
function of the form Y = ALβK1−β, previously used by Knut Wicksell, Philip Wicksteed,
and Léon Walras, although Douglas only acknowledges Wicksteed and Walras for their
contributions. Estimating this using least squares, he obtained a result for the exponent of labour
of 0.75—which was subsequently confirmed by the National Bureau of Economic Research to be
0.741. Later work in the 1940s prompted them to allow for the exponents on K and L to vary,
resulting in estimates that subsequently proved to be very close to improved measure of
productivity developed at that time.
A major criticism at the time was that estimates of the production function, although seemingly
accurate, were based on such sparse data that it was hard to give them much credibility. Douglas
remarked "I must admit I was discouraged by this criticism and thought of giving up the effort,
but there was something which told me I should hold on." The breakthrough came in using US
census data, which was cross-sectional and provided a large number of observations. Douglas
presented the results of these findings, along with those for other countries, at his 1947 address
as president of the American Economic Association. Shortly afterwards, Douglas went into
politics and was stricken by ill health—resulting in little further development on his side.
However, two decades later, his production function was widely used, being adopted by
economists such as Paul Samuelson and Robert Solow. The Cobb–Douglas production function
is especially notable for being the first time an aggregate or economy-wide production function
had been developed, estimated, and then presented to the profession for analysis; it marked a
landmark change in how economists approached macroeconomics from a microeconomics
perspective.

ADVANTAGES OF C-D PRODUCTION FUNCTION

The C-D production function possesses the following merits:
 This concept is essential for understanding the theories of production. In fact study of
production itself is a study of production function
 It is useful for understanding the law of variable proportions.
 It is also useful for understanding the returns to scale and for understanding the nature of
costs of production.
 It is a commonly used function in macroeconomics and forecast production.
 It is convenient in international and inter-industry comparisons.
 It is the most commonly used function in the field of econometrics.
 It can be fitted to time series analysis and cross section analysis.
 The function can be generalised in the case of ‘n’ factors of production.
 It becomes linear function in logarithm.
 It is more popular in empirical research.

DISADVANTAGES OF C-D PRODUCTION FUNCTION

The C-D production function possess following demerits:
 The C-D production function is criticised because it shows constant returns to scale. But
constant returns to scale are not an actuality, for either increasing or decreasing returns to
scale are applicable to production.
 No single producer raises output for the sake of getting constant returns. The producer
aims not at constant returns but at achieving increasing returns.
 C-D production function is only applicable in short run.
 The C-D production function considers only two inputs, labour and capital, and neglects
some important inputs, like raw materials, which are used in production. It is, therefore,
not possible to generalize this function to more than two inputs.
 One of the weaknesses of C-D function is the aggregation problem.

APPLICATION OF COBB DOUGLAS THEORY

STUDY PAPER - 1

Indian manufacturing industry in the era of globalization: A Cobb-Douglas production function

analysis

OBJECTIVE: Indian economy has been witnessing an uptrend in growth rate since 1990’s. The
main objective of the paper is to investigate the factors influenced on output.

STATISTICAL ANALYSIS : The study used output as a depended variable and number of
workers, fixed capital and factories are independent variables are considered for regression
analysis. We have used Cobb-Douglas production function. The study used Annual Survey of
Industry data, and 69 industries data used for analysis. Also, for the aggregate industry-wise
analysis the selected 69 three-digit industries are grouped into 12 industries as mentioned in the
ASI two-digit classification.

INTRODUCTION:
Rapid industrialization is an important way of faster development. The manufacturing industry
plays a vital role in industrial structure of the Indian economy. At present, the service and
industrial sector are the major contributors to the Indian economy and about 75 per cent of
India’s Gross Domestic Product (GDP) comes from these two sectors. India’s manufacturing
industry evidenced a healthy growth rate since 1950s. Initiation of economic reforms like
Liberalization, Privatization and Globalization in 1991s has been provided many challenges and
opportunities to Indian industries. With reforms Indian economy have potential to emerge as a
global manufacturing hub, but demands hardworking labour to avail the opportunities of LPG in
order to transform this potential into a reality. Indian manufacturing industry is facing higher
competition at international market. As a result the domestic market has also become more
competitive and export market finding difficult to survive. The main objective of the paper is to
investigate the factors leading to changes in output. To make the assessment of change, we have
employed Cobb-Douglas production function for the analysis. We also studied the Globalization
impact on Indian manufacturing industry and compared to pre globalization scenario.

HEREBY ATTACHING THE RESEARCH PAPER FOR STATISTICAL DATA AND

ANALYSIS EXPLAINATION :

https://www.researchgate.net/publication/318317107_Indian_manufacturing_industry_in_the_er
a_of_globalization_A_Cobb-Douglas_production_function_analysis