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Under Cobb–Douglas production function, capital refers to the value of all machinery, equipment, facilities, parts, and buildings, while labor refers to the number of hours worked by employees. It is important to note that there was a direct relation between capital and labor. By keeping this fact in mind, Cobb and Douglas used these elements in their production function to make it clear how important these two factors can get while processing a final product. As seen in the image above, labor and capital are equally important for any of the production process without these two elements, no production function can be completed. Labor refers to the staff who work day and night to make the final product using all the inputs. The two most important elements of Cobb–Douglas production function are Capital and Labor.Ĭapital refers to the amount that has been invested in the business or purchasing other inputs for the process of production.
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Generally, the inputs that are used in the production are the raw material which gives the final product, which is called output.
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Production function defines the relationship between quantity of inputs and quality of outputs, which are used in the production process. It is important to know that Cobb–Douglas production function can have more than two input elements. The equation of Cobb–Douglas formula is given below:į ( K, L ) = b K a L c f(K, L)=b K^ f ( K, L ) = b K a L c The equation of Cobb–Douglas formula represents capital with k and labor with L, and a, b, and c in the equation represent non-negative constants. For describing the relationship, they described capital and labor as the most typical inputs. Through his standard equation, he wants to develop the relationship between the amounts of input used in making an output. They have developed this equation between years 1927-1947. This production function is developed by Paul Douglas and Charles Cobb, as also shown in the image too. This function deals with the relationship between input and output used to produce a product. Cobb–Douglas production function is used in both microeconomics and macroeconomics.