This study investigates the elasticity of production factors in Indonesian manufacturing companies by applying two distinct approaches to model demand for production inputs. Using survey data from large and medium-sized enterprises (1995–2015), the research provides insights into how firms respond to input prices and adjustment costs.
The first approach applies transcendental logarithm equations, incorporating unrestricted, homotheticity, and adjustment cost models. The second approach employs a system of equations, with industry group variations used as a proxy for market input prices.
The findings reveal significant heterogeneity in cross-price elasticities between production inputs, showing both complementary and substitute relationships. As expected, own-price elasticity is negative across all inputs. Moreover, firms face positive adjustment costs when expanding production inputs, which highlights the challenges of scaling operations efficiently.
These results provide valuable implications for policymakers and industry stakeholders seeking to understand the dynamics of production input demand in Indonesia’s manufacturing sector.
👉 Read the full article here to explore the detailed findings and their implications for policymakers and practitioners.