<p>For example, if i have elasticity of substitution equal to 5 and 0.6 what does it imply about the capital to labor ratio? When it is 5 does it imply that it is easier to replace labor with capital. As a result, the capital labor ratio goes up? For 0.6 it is vice-versa?</p>

CC BY-SA 3.0
2016-03-27T20:17:27.217Z
"As a result, the capital labor ratio goes up?" It depends on the relative prices of capital and labor.
Giskard
CC BY-SA 3.0
2016-03-27T21:34:56.483Z
But if elasticity of substitution is 5 doesnt this imply that capital to labor ratio is high and capital share of national income is higher than labor share of national income?
Justin
CC BY-SA 3.0
2016-03-27T21:38:43.743Z
This does not appear anywhere in your question and has nothing to do with my statement? I am guessing your professor/example assumes a Cobb-Douglas production function otherwise I have no clue what you mean.
Giskard
CC BY-SA 3.0
2016-03-27T21:43:42.187Z
As far as I know, Cobb-Douglas production is necessary to have constant elasticity of substitution. I am trying to understand its deeper meaning. What is the difference between having 5 or 0.6 as elasticity of substitution? So I am trying to relate to capital and labor shares or some other implications.
Justin
CC BY-SA 3.0
2016-03-27T21:51:18.193Z
Well you did not say that the elasticity was constant, so I thought you meant it has this definite value given specific $K$ and $L$. Here is some info on constant elasticity: https://en.wikipedia.org/wiki/Constant_elasticity_of_substitution
Giskard
<labor-economics><human-capital>
What does the elasticity of substitution between capital and labour mean?
Justin
# What does the elasticity of substitution between capital and labour mean?

(Asked by: username_0 on 2016-03-27)

For example, if i have elasticity of substitution equal to 5 and 0.6 what does it imply about the capital to labor ratio? When it is 5 does it imply that it is easier to replace labor with capital. As a result, the capital labor ratio goes up? For 0.6 it is vice-versa?

**Tags:** labor-economics, human-capital

> **Comments:**
> **username_1**: "As a result, the capital labor ratio goes up?" It depends on the relative prices of capital and labor.  
> **username_0**: But if elasticity of substitution is 5 doesnt this imply that capital to labor ratio is high and capital share of national income is higher than labor share of national income?  
> **username_1**: This does not appear anywhere in your question and has nothing to do with my statement? I am guessing your professor/example assumes a Cobb-Douglas production function otherwise I have no clue what you mean.  
> **username_0**: As far as I know, Cobb-Douglas production is necessary to have constant elasticity of substitution. I am trying to understand its deeper meaning. What is the difference between having 5 or 0.6 as elasticity of substitution? So I am trying to relate to capital and labor shares or some other implications.  
> **username_1**: Well you did not say that the elasticity was constant, so I thought you meant it has this definite value given specific $K$ and $L$. Here is some info on constant elasticity: https://en.wikipedia.org/wiki/Constant_elasticity_of_substitution  

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## 0 answers

