Studying Substitution of Factors and Economies of Scale Using the Composite Cost Function in Fars Cement Factory

Abstract

It is important to analyze the relationship between inputs and economies in the production due to high share of added value and great contribution of cement industry in national production and construction projects. In this paper, returns to scale, elasticities of substitution, function coefficients and economies of scale in Fars Cement Company were extracted and analyzed using the composite cost function and dual cost approach. The iterated nonlinear seemingly unrelated regression (NLSUR) method from 2002 to 2012 and quarterly data with Limdep8 Software were used in order to extract the cost function. Allen cross partial elasticity results for each pair of inputs showed that labor is a substitution for capital and other services. Capital input and other services are complementary. In addition, demand price elasticities indicate inelasticity of production factors against changes in price of those factors. According to research results, production of cement in Fars Cement Company resulted in ascending economies of scale and returns to scale.

Keywords

• elasticities of substitution
• composite cost function
• returns to scale
• iterated nonlinear seemingly unrelated regressions