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elasticity of technical substitution


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The ratio of proportional change in the relative quantities of two inputs used by a firm to proportional change in their relative prices, holding total output constant. This elasticity has the same role for the firm as the elasticity of substitution has for the consumer. If it is high, a small change in the relative cost of two factors leads to a large change in relative quantities used by a cost-minimizing firm. If it is small, a large change in relative factor prices causes a cost-minimizing firm to make only a small change in factor proportions.

Subjects: Economics.


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