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Firstly they have given output elasticity of a factor, use of which is clear to me. It says to what degree my total output will vary due to a change in the quantity of a factor. But what else do we get to know from elasticity of Average product?

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    $\begingroup$ Can you please explain the question a bit better? To me it's unclear what you are asking. $\endgroup$
    – luchonacho
    Commented Oct 3, 2017 at 6:24
  • $\begingroup$ Hi and welcome to the site! What elasticity do you mean? Take a look at this link and make your question a bit clearer on what exactly you dont understand: investopedia.com/terms/e/elasticity.asp $\endgroup$ Commented Oct 3, 2017 at 8:01
  • $\begingroup$ They've given output elasticity of inputs and then went on on to show how we can show elasticity of average product as output elasticity minus one. My question is what is the use of knowing all these for a producer. $\endgroup$ Commented Oct 4, 2017 at 5:13
  • $\begingroup$ does my answer help you? $\endgroup$
    – EconJohn
    Commented Nov 7, 2017 at 4:08

2 Answers 2

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If you know Elasticity of average product you can identify how your output per worker or machine will change as $L$ or $K$ increases.

Recall the definition of elasticity is:

$$\mathcal{E}=\frac{\Delta y/y}{\Delta x/x}$$

average product of labor and capital:

$$AP_L=\frac{Q}{L}$$ $$AP_K=\frac{Q}{K}$$

therefore the elasticity of average product of labor and capital is:

$$\Gamma_L=\frac{\Delta AP/AP}{\Delta L/L}$$ $$\Gamma_K=\frac{\Delta AP/AP}{\Delta K/K}$$

This is useful for evaluating how existing worker or capital productivity will be impacted as a result of an increase in capital or labor.

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Companies with high elasticity ultimately compete with other businesses on price and are required to have a high volume of sales transactions to remain solvent. Firms that are inelastic, on the other hand, have products and services that are must-haves and enjoy the luxury of setting higher prices.

Source

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  • $\begingroup$ OP is not asking about demand elasticity of a luxury product. The tag shows he is interested in production function. $\endgroup$
    – london
    Commented Oct 7, 2017 at 11:36
  • $\begingroup$ @london The quote highlights high elasticity and low elasticity. It mentions that the company "has the luxury", not luxury products. $\endgroup$ Commented Oct 7, 2017 at 11:39
  • $\begingroup$ I think you are confusing the price elasticity of demand for luxury goods, as far as I can see, this comes form Investopedia. It defines the price elasticity of demand for goods. $\endgroup$
    – london
    Commented Oct 7, 2017 at 11:40
  • $\begingroup$ The OP is intersted in the elasticity of production with respect to inputs, so you should demonstrate your answer with an example of a production function. Please read. $\endgroup$
    – london
    Commented Oct 7, 2017 at 11:41
  • $\begingroup$ Why don't you submit your answer @london ? :) $\endgroup$ Commented Oct 7, 2017 at 11:56

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