CES holds that the ability to substitute one input factor with another (for example labour with capital) to maintain the same level of production stays constant over different production levels.
What this means is that both producers and consumers have similar input structures and preferences no matter the level of output or utility.
The vital economic element of the measure is that it provided the producer a clear picture of how to move between different modes or types of production, for example between modes of production relying on more labour.
Several economists have featured in the topic and have contributed in the final finding of the constant.
They include Tom McKenzie, John Hicks and Joan Robinson.
This aggregator function exhibits constant elasticity of substitution.
On the contrary of restricting direct empirical evaluation, the constant Elasticity of Substitution are simple to use and hence are widely used.
In other words, the production technology has a constant percentage change in factor (e.g. labour and capital) proportions due to a percentage change in marginal rate of technical substitution.
The two factor (capital, labor) CES production function introduced by Solow,[2] and later made popular by Arrow, Chenery, Minhas, and Solow is:[3][4][5][6] where As its name suggests, the CES production function exhibits constant elasticity of substitution between capital and labor.
That is, The general form of the CES production function, with n inputs, is:[7] where Extending the CES (Solow) functional form to accommodate multiple factors of production creates some problems.
Different nests (levels) allow for the introduction of the appropriate elasticity of substitution.
[9] CES utility functions are a special case of homothetic preferences.
A CES indirect (dual) utility function has been used to derive utility-consistent brand demand systems where category demands are determined endogenously by a multi-category, CES indirect (dual) utility function.
It has also been shown that CES preferences are self-dual and that both primal and dual CES preferences yield systems of indifference curves that may exhibit any degree of convexity.