Humphrey fundamental to economic analysis is the idea of a production function. Production function is a way of calculating what comes out of production to what has gone into it. I am not very familiar with its implications in consumer theory, but from the production point of view, ive seen it widely used. The translog profit function approach muhammad ali chaudhary, mushtaq ahmad khan, and kaukab hassan naqvi the importance of estimating valid elasticities of farm output supply and input demand can hardly be overemphasised. The translog function can be used not only in preferences but also in production and cost functions. The translog function doesnt impose additivity and homogeneity, and hence constant elasticity of substitution. Devesh raval november 15, 2010 abstract both the recent literature on production function identi. The translog production function and variable returns to scale. S0, the theeinput transcendental logarithmic translog. A popular alternative is the translog even if, in this case, it is not possible to retrieve the parameters of the production function from the cost function.
Pdf in a translog production function, the number of parameters practically explodes as the number of. Estimates of farm output supply and input demand elasticities. As the ces function is nonlinear in parameters and cannot be linearised analytically, it is not possible to estimate it with. The translog production function is an approximation of the ces function by a secondorder taylor polynomial about, i. The name translog stands for transcendental logarithmic. View the article pdf and any associated supplements and figures for a period of 48 hours. Production function an overview sciencedirect topics. Estimating production functions paulschrimpf ackerberg, caves,and frazer2015 collinearityinop acfestimator relationtodynamic panel empiricalexample gandhi, navarro,and rivers20 identi. In other words, log y is a linear function of log x1 and log x2. The production function is the central part of production theory and as such there is a theoretical. Thus, y is a function of k, l, and all possible interactions kl. As stated above, some empirical economists, seeking to estimate cobbdouglas or translog production functions, have confined their attention to only those farmers who have positive values of the key input or explanatory variables. The formula q fk, l, p, h calculates the maximum amount of output you can get from a certain.
Estimation of cost functions and the study of cost efficiency. Foreword this booklet is typed based on professor barry colys lecture notes for abiz 7940 production economics in winter 2008. On the estimation of production functions george e. Data and parameter estimates were previously stored in datasets est and klems in the example estimating a derived demand system from a translog cost function. The ces was a natural extension of the cobbdouglas in that it permitted the elasticity of substitution to be something other than unity. The purpose of this paper is to estimate a system of input demand responses for french agriculture, supposed to be in static equilibrium with respects to all inputs. This document is highly rated by commerce students and has been viewed 50790 times. Stochastic frontier models and efficiency analysis e4 this is the full list of general specifications that are applicable to this model estimator. Elasticity of a function of a single variable before we meet this guest, let us spend a bit of time with a slightly simpler notion, the elasticity of a a function of a single variable.
Production is the result of cooperation of four factors of production viz. Youn kim abstractthis paper examines existing methods of estimating the translog production function and provides a general received for publication december 15, 1989. Lecture notes on elasticity of substitution ted bergstrom, ucsb economics 210a october 26, 2015 todays featured guest is \the elasticity of substitution. The translog production function itself is a very flexible way of modelling the production process, which implies that to discipline its estimated coefficients, additional rigor has to be imposed by estimating it jointly with other equations. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs generally capital and labor. The transformed function is the equation for a simple two variable regression line in which all observations in the data set used. In this sense, the translog function can represent a production function that is not homogeneous. Its properties, its several interpretations and estimation problems. Calculating elasticities from a translog cost function.
Chapter 5 production function part 1 chapter notes. The translog function allows for both positive and negative scale effects, that is, average cost can both decrease and increase across the range of the cost function. This is evident from the fact that no single commodity can be produced without the help of any one of these four factors of production. In a translog production function, the number of parameters practically explodes as the number of considered production factors increases. It can be seen from the literature, ols estimator is often used to estimate production functions. A production function, such as the generalized ces production function, can be used to model how a firm combines inputs to produce outputs. In our estimates of 1 we use materials as the flexible input to compute the output elasticity. This function has both linear and quadratic terms with the ability of using more than two factor inputs. Consequently, the shortcoming in the estimation of the respective production function is the occurrence of collinearity. Production functions 3 outputit is sometimesuseful to represent the technology of the. This function can be approximated by second order taylor series christensen, et al. An alternativetothecobbdouglasproduction function is the translog production function.
A production function shows costs for using inputs and revenues for output sold. As the ces function is nonlinear in parameters and cannot be linearised analytically, it is not possible to estimate it with the usual linear estimation techniques. A translog production function with regional dummies is specified. Calculating elasticities from a translog cost function overview elasticities of substitution are an important measure of production relationships.
A cost function cq is a function of q, which tells us what the minimum cost. The estimation of the cobbdouglas function 431 an important question because. Production function with factor augmenting technology. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Im a beginner in r and im wondering how to interprete my results my question is about the results that i got after i did a regression on the translog production function for panel data. The next obvious step is to generate a function which allows. A production function, such as the translog transcendental logarithmic production function, can be used to model how a firm combines inputs to produce outputs. Meller, the translog production function olsq and thus our. In the context of time series estimates of an aggregate production function for the us manufacturing sector the same result was found by berndt and christensen 1973, tables 4, 6, 7, when estimating the translog function from side conditions for profit maximization. The translog production functions occurred in the context of researches related. Pdf some aspects of the translog production function. To derive production function, we must know which technology the.
The fourth section specifies and estimates the production function section 5. In this context, the empirical literature on four different production functions cobbdouglas, ces, ves and translog has been examined. Longrun cost function cost function let w be the cost per unit of labor and r be the cost per unit of capital. The transcendental logarithmic cost function looks like. The threeinput translog production function can be written in terms of logarithms as. The adjusted model is wellbehaved for a large region in the input space and therefore allows general conclusions.
The cobbdouglas production function 173 the resulting equation is referred to as linear in the parameters or linear in the coefficients. Lecture notes on constant elasticity functions thomas f. Of particular interest is the scale economy effect. References 0 translog cost function and the fitted cost shares of factor inputs. The translog function is an attractive flexible function. This is a list of production functions that have been used in the economics literature. This booklet is typed based on professor barry colys lecture notes for abiz 7940.
It is a tedious but straightforward application of lagrangian calculus to demonstrate. Algebraic production functions and their uses before cobbdouglas thomas m. Variable elasticity substitution production function. The analytical method used is descriptive method and analysis of translog production functions with scenarios. When derived demand systems are obtained from a cost function, it is possible to estimate several elasticities of substitution along with price elasticities. Constant elasticity of substitution production function and 4. In a translog production function, the number of parameters practically. It is interesting to note some of the values observed in table 3. The theoretical framework in this research is the flexible production function. Production function in economics, a production function relates physical output of a production process to physical inputs or factors of production. Douglas and constant the translog production function. As the production function is given in the form of a table showing physical combinations of different inputs to obtain certain unit of output, it is not within the domain of economics.
Pdf some aspects of the translog production function estimation. For a much more extensive discussion of various types of production functions and their properties, their relationships and origin, see chambers 1988 and sickles and zelenyuk 2019, chapter 6. The stochastic frontier production function model single cobbdouglas form for panel data. The elasticities are evaluated at the sample means, so the means procedure is used to compute the sample mean cost shares and store this information in the dataset meanshares. If the null hypothesis, when equals zero, is accepted, it will indicate that 2 x is zero, and thus the termxit can be taken out of the model, leaving a specification with parameters to be compatibly assessed by resorting to smallest normal differences. Apr 24, 2020 chapter 5 production function part 1 chapter notes, micro economics, class 12 edurev notes is made by best teachers of commerce. Production functions are a key part of modelling national output and national income. Technology can be represented by a production function, such as cobb. Some aspects of the translog production function estimation. It and its allied concept, the utility function, form the twin pillars of. Algebraic production functions and their uses before cobb. To the economists, a production function is something more.
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