Elasticity of Substitution and Returns to Scale in Manufacturing Sector of Andhra Pradesh: An Empirical Exercise

Abstract

In this paper, the author has attempted to study the output elasticity, nature of returns to scale and find out whether the elasticity of substitution between two inputs is different from unity or not in the manufacturing sector of Andhra Pradesh State during 1985-86 to 2005-06 by using unrestricted Cobb-Douglas, restricted log-linear and CES production functions. Major findings of the study indicate that output elasticity with respect to capital is greater than unity and returns to scale are increasing reveals that the manufacturing sector of Andhra Pradesh State is in the phase of increasing returns to scale. Further, the elasticity of output per labour with respect to capital per labour is also more than unity showing that the accumulation of capital per labour is more productive in the manufacturing sector of the State. The elasticity of substitution is significantly different from unity in the manufacturing sector which is constant elasticity of substitution represents that the production function follows constant elasticity of substitution (CES) in the manufacturing sector of State.