Substitutionselasticitet

Substitutionselasticitet, often referred to as the elasticity of substitution, is an economic concept that measures the substitutability between different inputs in a production process or between different goods in consumption. It quantifies how much the ratio of two inputs (or goods) can change in response to a 1% change in their relative prices, while maintaining the same level of output (or utility).

In production, a high elasticity of substitution indicates that producers can easily switch between different factors of production, such as labor and capital, as their relative prices change. For example, if labor becomes more expensive relative to capital, a firm with a high elasticity of substitution will readily replace labor with capital to maintain its output level. Conversely, a low elasticity of substitution implies that the inputs are relatively fixed in their proportions, making it difficult to substitute one for another.

In consumption, it describes how readily consumers can substitute one good for another when their prices change, while keeping their satisfaction level constant. If the elasticity of substitution between two goods is high, consumers can easily switch to the relatively cheaper good when the price of one increases. If it is low, consumers find it difficult to replace one good with another, even if prices change significantly. The Cobb-Douglas production function and utility function are examples where the elasticity of substitution is a key parameter.