Elasticity of Technical Substitution

Marginal Rate of Technical Substitution (MRTS) is the slope of an isoquant and depicts the rate at which one input is substituted for the other, but it does not determine the degree of substitution between these inputs.

The elasticity of technical substitution is the only measure which determines the substitutability of factors/inputs.

The elasticity of technical substitution is defined as the percentage change in the capital-labour ratio (K/L) divided by the percentage change in the MRTS. Symbolically,

Or,

Since throughout an isoquant, both K/L and MRTS move in the same direction; therefore the value of σ is always positive.

Moreover, the value of elasticity of technical substitution depends on the curvature of the isoquants. It varies between 0 and ∞, depending on the nature of the production function. Production function determines the curvature of the various kinds of isoquants.

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